SOLUTION MANUAL FOR
x x
Principles x of x Taxation x for x Business x and x Investment x Planning x 2025 x Evergreen x Release x By x Sally
x Jones,
Shelley x Rhoades-Catanach
ter x 1 x Taxes x and x Taxing x Jurisdictions
Questions x and x Problems x for x Discussion
1. Tax x payments xdiffer xfrom x government xfines xand xpenalties xbecause xthey x aren‘t
x intended x to xdeter x or x punish x unacceptable x behavior. x Tax x payments x differ x from
x fees x or x user x charges xbecause x they x don‘t x entitle x the x payer x to x a x specific
x government x good x or x service, x such x as x a xpostage x stamp x or x a x driver‘s x license.
x Tax x payments x also x differ x from x fees x or x user x charges xbecause x they x are
x compulsory.
2. This x payment x has x characteristics x of x a x tax, x a x penalty, x and x a x user x fee. x The
x compulsory xpayment xis x not xspecifically xpunitive xbut xdoes xapply x selectively x to xthose
xcompanies xmost xlikely x responsible xfor x the x polluted xcondition xof x Green xRiver.
xHowever, x these x same xcompanies x may x be x the x entities x that x benefit x most x from
x the x environmental x clean-up.
3. This x payment x more x closely x resembles x a x fee x for x a x government x service x than x a
x transaction- xbased x tax x because x the x transaction x occurs x between x a x private x party x and
x the xjurisdiction xitself, xrather x than x between x private xparties xengaging x in xa xmarket
xtransaction. xThe x payment xalso xentitles x the x payer x to x a x specific x benefit x (the x right x to
x marry x under x law).
4. To x the x extent x that x the x decline x in x exterior x maintenance x reduces x the x value x of x Mr.
x Powell‘s xapartment x complex, x he x bears x the x incidence x of x the x increased x property x tax.
x To x the x extent x that xthe x decline x reduces x the xvalue x of xadjoining x properties x or x makes
x the xneighborhood x less xattractive, xthe x owners xof xthe xadjoining xproperties xand xthe
xneighborhood xresidents xshare xthe x incidence xof x the xtax x increase.
5. People x who x don‘t x directly x use x public x schools x (such x as x Mr. x and x Mrs. x Ahern x or
x people x who xdon‘t x have x children) x indirectly x benefit x from x a x public x education
x system x for x the x general xpopulation. x Arguably, x public x education xcontributes xto xa
xskilled xworkforce xand ximproves xthe xcultural x and x social x environment x in x which x Mr. x and
x Mrs. x Ahern x live. x Based x on x this x argument, xMr. x and x Mrs. x Ahern x should x not x be
x exempt x from x the x local x property x tax.
6. The x consumers x who x pay x the x same x price xfor x a x smaller x bar x of x soap x of
x lesser x quality xbear xthe x incidence x of x the x new x gross x receipts x tax.
7. Real x property x can‘t x be x hidden x or xmoved, x and xits x ownership x (legal x title) x is x a
xmatter x of xpublic x record. x In x contrast, x personal x property x is x mobile x and x may x be
x easily x concealed. xMoreover, x jurisdictions x may x not xhave xan xeffective x means x to
x discover x or x trace xownership xof x personal x property.
8. Arguably, xprivate xgolf xcourses xbeautify xthe xlocality xand xare xenvironmentally xmore
xdesirable x than x other x commercial x activities. x They x also x may x require x more
xacreage xthan x other xbusinesses x and, xtherefore, x would xbe xat x a xcompetitive
x disadvantage xwithout xa x preferential xreal xproperty x tax x rate.
Copyright x ©2020 x McGraw-Hill x Education. x All x rights x reserved.
No xreproduction x or x distribution x without x the x prior x written x consent x of
x McGraw-Hill xEducation.
,9. Many x jurisdictions x that x levy x property x taxes x provide x an x exemption x for x public
x institutions, xsuch x as x state x universities x or x private x colleges. x If x University x K x is
x entitled x to x such x an xexemption, x every x commercial xbuilding x or x residence x acquired
x by x the xUniversity x reduces x the xlocal xjurisdiction‘s x property x tax x base.
Copyright x ©2020 x McGraw-Hill x Education. x All x rights x reserved.
No xreproduction x or x distribution x without x the x prior x written x consent x of
x McGraw-Hill xEducation.
,10. Excise x taxes xare ximposed x on x a x much xnarrower x range x of x consumer x goods x and
x services xthan xsales x taxes. x Consequently, x people xcan xmore x readily x avoid
xpurchasing x the xspecific xgood xor x service xsubject x to x excise xtax.
11. The x tax x increase x may x have x reduced x the x aggregate x demand x for x consumer x goods
x and, xconsequently, xmunicipal xresidents xare xbuying xfewer x goods. x A xsecond xpossibility
xis xthat xmunicipal x residents x are x traveling x to x other x jurisdictions x with x lower x tax x rates
x or x making x more xpurchases x through x mail xorder x catalogs x or x on-line.
12. From x a x political x perspective, x liquor x and x cigarettes x sales x make x an x excellent x tax x base
x because xconsumption x of x the x two x products x is x purely x discretionary, x and x any x decline
x in x consumption xbecause x of x the x tax x is x socially x desirable. x From x an x economic
x perspective, x these x sales x are x a xgood x tax x base x because x the x demand x for x liquor
x and x cigarettes x is x relatively x price x inelastic. x In xother x words, x people x who x drink x and
x smoke x on x a x regular x basis x buy x these x products xregardless xof xa xheavy x excise xtax.
13. The xfederal x income xhas x the x broader x base. x The xfederal xpayroll x tax x is ximposed x on
x wages, xsalaries, x and x other x forms x of x compensation x earned x by x employees. x The
x federal x income x tax x is ximposed x on x all x types x of x compensation x as x well x as x net
x business x profit, x investment x income, xand x any x other x income x item x from x whatever
x source x derived.
14. A x property x tax x is x a x periodic x (usually x annual) x tax x levied x on x the x ownership x of
x property x and xbased x on x the x value x of x the x property x on x a x particular x assessment
x date. x A x transfer x tax x is x a xtransaction- x based x tax x levied x on xthe x transfer x of
x property x from x one x party x to xanother. x A xtransfer x tax x is x based x on x the x value x of
x the x property x at x date x of x transfer.
15. If x the x federal x government x could x ―piggy x back‖ x a x national x sales x tax x on x existing
x state x sales xtax x collection x systems, x the x federal x government x could x avoid x creating x a
x new x federal x agency xfor x collecting x the x tax. x In x contrast, x the x federal x government
x would x have x to x create x a x new xcollection x system x for x a x national x VAT. x However, x a
x national x VAT x would x be x less x likely x to xcause xjurisdictional x conflict xbetween x the
xfederal x government xand xthe xstates x because xstates xdon‘t x depend x on x VATs x as x a
x source x of x revenue.
16. The x Internal x Revenue x Code x is x federal x statutory x law, x enacted x by x Congress x and
x signed x by xthe x President. xTechnically, x Treasury x regulations x only x interpret x and
xexplain xthe x statute x and xaren‘t x laws x in x their x own x right. x Thus, x regulations x are x less
x authoritative x than x the x Code x itself. xHowever, x because x Congress x authorized xthe
xTreasury x to xwrite xregulations, x they x are xthe xgovernment‘s x official xinterpretation xof
xstatutory xlaw. x Practically, xthe xregulations xcarry xconsiderable xauthoritative x weight.
Application xProblems
1. a. The xstatement x of xfacts xidentifies xthree xtaxpayers: x Mr. xJosh xKenney, xJK
Services, xand xJK xRealty.
x
b. The x government x of x the x locality x in x which x Mr. x Kenney x resides, x the x state
x government x of xVermont, x and x the x U.S. x government x have x jurisdiction x to x tax
x Mr. x Kenney. x The x local xgovernments x of x the x four x counties x in x which x JK
x Services x conducts x business, x the x state xgovernment x of x Vermont, xand xthe xU.S.
x government xhave xjurisdiction x to xtax x JK x Services. xThe x city x of x Boston, x the x state
x government x of x Massachusetts, x and x the x U.S. x government xhave xjurisdiction x to
xtax x JK x Realty.
2. a. The x United x States x has x jurisdiction x to x tax x Mrs. x May x because x she x is x a x permanent x resident.
Copyright x ©2020 x McGraw-Hill x Education. x All x rights x reserved.
No xreproduction x or x distribution x without x the x prior x written x consent x of
x McGraw-Hill xEducation.
, b. The x United x States x has x jurisdiction x to xtax x Mrs. x May x only xon x the x U.S.
x source x rental xincome x generated x by x the x Manhattan xreal x estate.
Copyright x ©2020 x McGraw-Hill x Education. x All x rights x reserved.
No xreproduction x or x distribution x without x the x prior x written x consent x of
x McGraw-Hill xEducation.
x x
Principles x of x Taxation x for x Business x and x Investment x Planning x 2025 x Evergreen x Release x By x Sally
x Jones,
Shelley x Rhoades-Catanach
ter x 1 x Taxes x and x Taxing x Jurisdictions
Questions x and x Problems x for x Discussion
1. Tax x payments xdiffer xfrom x government xfines xand xpenalties xbecause xthey x aren‘t
x intended x to xdeter x or x punish x unacceptable x behavior. x Tax x payments x differ x from
x fees x or x user x charges xbecause x they x don‘t x entitle x the x payer x to x a x specific
x government x good x or x service, x such x as x a xpostage x stamp x or x a x driver‘s x license.
x Tax x payments x also x differ x from x fees x or x user x charges xbecause x they x are
x compulsory.
2. This x payment x has x characteristics x of x a x tax, x a x penalty, x and x a x user x fee. x The
x compulsory xpayment xis x not xspecifically xpunitive xbut xdoes xapply x selectively x to xthose
xcompanies xmost xlikely x responsible xfor x the x polluted xcondition xof x Green xRiver.
xHowever, x these x same xcompanies x may x be x the x entities x that x benefit x most x from
x the x environmental x clean-up.
3. This x payment x more x closely x resembles x a x fee x for x a x government x service x than x a
x transaction- xbased x tax x because x the x transaction x occurs x between x a x private x party x and
x the xjurisdiction xitself, xrather x than x between x private xparties xengaging x in xa xmarket
xtransaction. xThe x payment xalso xentitles x the x payer x to x a x specific x benefit x (the x right x to
x marry x under x law).
4. To x the x extent x that x the x decline x in x exterior x maintenance x reduces x the x value x of x Mr.
x Powell‘s xapartment x complex, x he x bears x the x incidence x of x the x increased x property x tax.
x To x the x extent x that xthe x decline x reduces x the xvalue x of xadjoining x properties x or x makes
x the xneighborhood x less xattractive, xthe x owners xof xthe xadjoining xproperties xand xthe
xneighborhood xresidents xshare xthe x incidence xof x the xtax x increase.
5. People x who x don‘t x directly x use x public x schools x (such x as x Mr. x and x Mrs. x Ahern x or
x people x who xdon‘t x have x children) x indirectly x benefit x from x a x public x education
x system x for x the x general xpopulation. x Arguably, x public x education xcontributes xto xa
xskilled xworkforce xand ximproves xthe xcultural x and x social x environment x in x which x Mr. x and
x Mrs. x Ahern x live. x Based x on x this x argument, xMr. x and x Mrs. x Ahern x should x not x be
x exempt x from x the x local x property x tax.
6. The x consumers x who x pay x the x same x price xfor x a x smaller x bar x of x soap x of
x lesser x quality xbear xthe x incidence x of x the x new x gross x receipts x tax.
7. Real x property x can‘t x be x hidden x or xmoved, x and xits x ownership x (legal x title) x is x a
xmatter x of xpublic x record. x In x contrast, x personal x property x is x mobile x and x may x be
x easily x concealed. xMoreover, x jurisdictions x may x not xhave xan xeffective x means x to
x discover x or x trace xownership xof x personal x property.
8. Arguably, xprivate xgolf xcourses xbeautify xthe xlocality xand xare xenvironmentally xmore
xdesirable x than x other x commercial x activities. x They x also x may x require x more
xacreage xthan x other xbusinesses x and, xtherefore, x would xbe xat x a xcompetitive
x disadvantage xwithout xa x preferential xreal xproperty x tax x rate.
Copyright x ©2020 x McGraw-Hill x Education. x All x rights x reserved.
No xreproduction x or x distribution x without x the x prior x written x consent x of
x McGraw-Hill xEducation.
,9. Many x jurisdictions x that x levy x property x taxes x provide x an x exemption x for x public
x institutions, xsuch x as x state x universities x or x private x colleges. x If x University x K x is
x entitled x to x such x an xexemption, x every x commercial xbuilding x or x residence x acquired
x by x the xUniversity x reduces x the xlocal xjurisdiction‘s x property x tax x base.
Copyright x ©2020 x McGraw-Hill x Education. x All x rights x reserved.
No xreproduction x or x distribution x without x the x prior x written x consent x of
x McGraw-Hill xEducation.
,10. Excise x taxes xare ximposed x on x a x much xnarrower x range x of x consumer x goods x and
x services xthan xsales x taxes. x Consequently, x people xcan xmore x readily x avoid
xpurchasing x the xspecific xgood xor x service xsubject x to x excise xtax.
11. The x tax x increase x may x have x reduced x the x aggregate x demand x for x consumer x goods
x and, xconsequently, xmunicipal xresidents xare xbuying xfewer x goods. x A xsecond xpossibility
xis xthat xmunicipal x residents x are x traveling x to x other x jurisdictions x with x lower x tax x rates
x or x making x more xpurchases x through x mail xorder x catalogs x or x on-line.
12. From x a x political x perspective, x liquor x and x cigarettes x sales x make x an x excellent x tax x base
x because xconsumption x of x the x two x products x is x purely x discretionary, x and x any x decline
x in x consumption xbecause x of x the x tax x is x socially x desirable. x From x an x economic
x perspective, x these x sales x are x a xgood x tax x base x because x the x demand x for x liquor
x and x cigarettes x is x relatively x price x inelastic. x In xother x words, x people x who x drink x and
x smoke x on x a x regular x basis x buy x these x products xregardless xof xa xheavy x excise xtax.
13. The xfederal x income xhas x the x broader x base. x The xfederal xpayroll x tax x is ximposed x on
x wages, xsalaries, x and x other x forms x of x compensation x earned x by x employees. x The
x federal x income x tax x is ximposed x on x all x types x of x compensation x as x well x as x net
x business x profit, x investment x income, xand x any x other x income x item x from x whatever
x source x derived.
14. A x property x tax x is x a x periodic x (usually x annual) x tax x levied x on x the x ownership x of
x property x and xbased x on x the x value x of x the x property x on x a x particular x assessment
x date. x A x transfer x tax x is x a xtransaction- x based x tax x levied x on xthe x transfer x of
x property x from x one x party x to xanother. x A xtransfer x tax x is x based x on x the x value x of
x the x property x at x date x of x transfer.
15. If x the x federal x government x could x ―piggy x back‖ x a x national x sales x tax x on x existing
x state x sales xtax x collection x systems, x the x federal x government x could x avoid x creating x a
x new x federal x agency xfor x collecting x the x tax. x In x contrast, x the x federal x government
x would x have x to x create x a x new xcollection x system x for x a x national x VAT. x However, x a
x national x VAT x would x be x less x likely x to xcause xjurisdictional x conflict xbetween x the
xfederal x government xand xthe xstates x because xstates xdon‘t x depend x on x VATs x as x a
x source x of x revenue.
16. The x Internal x Revenue x Code x is x federal x statutory x law, x enacted x by x Congress x and
x signed x by xthe x President. xTechnically, x Treasury x regulations x only x interpret x and
xexplain xthe x statute x and xaren‘t x laws x in x their x own x right. x Thus, x regulations x are x less
x authoritative x than x the x Code x itself. xHowever, x because x Congress x authorized xthe
xTreasury x to xwrite xregulations, x they x are xthe xgovernment‘s x official xinterpretation xof
xstatutory xlaw. x Practically, xthe xregulations xcarry xconsiderable xauthoritative x weight.
Application xProblems
1. a. The xstatement x of xfacts xidentifies xthree xtaxpayers: x Mr. xJosh xKenney, xJK
Services, xand xJK xRealty.
x
b. The x government x of x the x locality x in x which x Mr. x Kenney x resides, x the x state
x government x of xVermont, x and x the x U.S. x government x have x jurisdiction x to x tax
x Mr. x Kenney. x The x local xgovernments x of x the x four x counties x in x which x JK
x Services x conducts x business, x the x state xgovernment x of x Vermont, xand xthe xU.S.
x government xhave xjurisdiction x to xtax x JK x Services. xThe x city x of x Boston, x the x state
x government x of x Massachusetts, x and x the x U.S. x government xhave xjurisdiction x to
xtax x JK x Realty.
2. a. The x United x States x has x jurisdiction x to x tax x Mrs. x May x because x she x is x a x permanent x resident.
Copyright x ©2020 x McGraw-Hill x Education. x All x rights x reserved.
No xreproduction x or x distribution x without x the x prior x written x consent x of
x McGraw-Hill xEducation.
, b. The x United x States x has x jurisdiction x to xtax x Mrs. x May x only xon x the x U.S.
x source x rental xincome x generated x by x the x Manhattan xreal x estate.
Copyright x ©2020 x McGraw-Hill x Education. x All x rights x reserved.
No xreproduction x or x distribution x without x the x prior x written x consent x of
x McGraw-Hill xEducation.
