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