SOLUTION MANUAL FOR a a
PrinciplesofTaxation forBusinessandInvestment Planning 202023rd Edition by a a a a a a
aSally Jones, Shelley Rhoades Catanach
a a a a
Chapter1 Taxes and Taxing Jurisdictions
a a a a
Questionsand Problems forDiscussion a a
1. Tax payments differ from government fines and penalties because they aren‘t intended to
a a a a a a a a a a a a
adeter or punish unacceptable behavior. Tax payments differ from fees or user charges
a a a a a a a a a a a a
abecause they don‘t entitle the payer to a specific government good or service, such as a
a a a a a a a a a a a a a a a
apostage stamp or a driver‘s license. Tax payments also differ from fees or user charges
a a a a a a a a a a a a a a
abecause they are compulsory. a a a
2. This payment has characteristics of a tax, a penalty, and a user fee. The compulsory payment
a a a a a a a a a a a a a a a
a is not specifically punitive but does apply selectively to those companies most likely responsible
a a a a a a a a a a a a a
afor the polluted condition of Green River. However, these same companies may be the entities
a a a a a a a a a a a a a a a
athat benefit most from the environmental clean-up.
a a a a a a
3. This payment more closely resembles a fee for a government service than a transaction-based tax
a a a a a a a a a a a a a a
abecause the transaction occurs between a private party and the jurisdiction itself, rather than
a a a a a a a a a a a a a a
abetween private parties engaging in a market transaction. The payment also entitles the payer to
a a a a a a a a a a a a a a
aa specific benefit (the right to marry under law).
a a a a a a a a
4. To the extent that the decline in exterior maintenance reduces the value of Mr. Powell‘s
a a a a a a a a a a a a a a
aapartment complex, he bears the incidence of the increased property tax. To the extent that the
a a a a a a a a a a a a a a a
adecline reduces the value of adjoining properties or makes the neighborhood less attractive,
a a a a a a a a a a a a
athe owners of the adjoining properties and the neighborhood residents share the incidence of
a a a a a a a a a a a a a
athe tax increase.
a a
5. People who don‘t directly use public schools (such as Mr. and Mrs. Ahern or people who don‘t have
a a a a a a a a a a a a a a a a a
achildren) indirectly benefit from a public education system for the general population. Arguably,
a a a a a a a a a a a a
apublic education contributes to a skilled workforce and improves the cultural and social
a a a a a a a a a a a a
aenvironment in which Mr. and Mrs. Ahern live. Based on this argument, Mr. and Mrs. Ahern should
a a a a a a a a a a a a a a a a
anot be exempt from the local property tax.
a a a a a a a
6. The consumers who pay the same price for a smaller bar of soap of lesser quality bear the
a a a a a a a a a a a a a a a a a
aincidence of the new gross receipts tax. a a a a a a
7. Real property can‘t be hidden or moved, and its ownership (legal title) is a matter of public
a a a a a a a a a a a a a a a a
arecord. In contrast, personal property is mobile and may be easily concealed. Moreover,
a a a a a a a a a a a a
ajurisdictions may not have an effective means to discover or trace ownership of personal
a a a a a a a a a a a a a
aproperty.
8. Arguably, private golf courses beautify the locality and are environmentally more desirable than
a a a a a a a a a a a a
aother commercial activities. They also may require more acreage than other businesses and,
a a a a a a a a a a a a
atherefore, would be at a competitive disadvantage without a preferential real property
a a a a a a a a a a a
atax rate.
a
9. Many jurisdictions that levy property taxes provide an exemption for public institutions, such as
a a a a a a a a a a a a a
astate universities or private colleges. If University K is entitled to such an exemption, every
a a a a a a a a a a a a a a
acommercial building or residence acquired by the University reduces the local jurisdiction‘s
a a a a a a a a a a a
aproperty tax base. a a
Copyright a©2020 aMcGraw-Hill aEducation. a All arights areserved.
No areproduction aor adistribution awithout athe aprior awritten aconsent a of aMcGraw-
Hill aEducation.
,10. Excise taxes are imposed on a much narrower range of consumer goods and services than
a a a a a a a a a a a a a a
sales taxes. Consequently, people can more readily avoid purchasing the specific good
a a a a a a a a a a a a
or service subject to excise tax.
a a a a a a
11. The tax increase may have reduced the aggregate demand for consumer goods and,
a a a a a a a a a a a a
consequently, municipal residents are buying fewer goods. A second possibility is that
a a a a a a a a n a a a
municipal residents are traveling to other jurisdictions with lower tax rates or making
a a a a a a a a a a a a a
more purchases through mail order catalogs or on-line.
a a a a a a a a
12. From a political perspective, liquor and cigarettes sales make an excellent tax base because
a a a a a a a a a a a a a
consumption of the two products is purely discretionary, and any decline in consumption
a a a a a a a a a a a a a
because of the tax is socially desirable. From an economic perspective, these sales are a good
a a a a a a a a a a a a a a a a
tax base because the demand for liquor and cigarettes is relatively price inelastic. In other
a a a a a a a a a a a a a a a
words, people who drink and smoke on a regular basis buy these products regardless of a heavy
a a a a a a a a a a a a a a a a a
excise tax.
a a
13. The federal income has the broader base. The federal payroll tax is imposed on wages, salaries,
a a a a a a a a a a a a a a a
and other forms of compensation earned by employees. The federal income tax is imposed on
a a a a a a a a a a a a a a a
all types of compensation as well as net business profit, investment income, and any other
a a a a a a a a a a a a a a a
income item from whatever source derived.
a a a a a a
14. A property tax is a periodic (usually annual) tax levied on the ownership of property and
a a a a a a a a a a a a a a a
based on the value of the property on a particular assessment date. A transfer tax is a
a a a a a a a a a a a a a a a a a
transaction- based tax levied on the transfer of property from one party to another. A transfer tax
a a a a a a a a a a a a a a a a a
is based on the value of the property at date of transfer.
a a a a a a a a a a a a
15. If the federal government could ―piggy back‖ a national sales tax on existing state sales tax
a a a a a a a a a a a a a a a
collection systems, the federal government could avoid creating a new federal agency for
a a a a a a a a a a a a a
collecting the tax. In contrast, the federal government would have to create a new collection
a a a a a a a a a a a a a a a
system for a national VAT. However, a national VAT would be less likely to cause jurisdictional
a a a a a a a a a a a a a a a a
conflict between the federal government and the states because states don‘t depend on VATs
a a a a a a a a a a a a a a
as a source of revenue.
a a a a a
16. The Internal Revenue Code is federal statutory law, enacted by Congress and signed by the
a a a a a a a a a a a a a a
President. Technically, Treasury regulations only interpret and explain the statute and aren‘t laws
a a a a a a a a a a a a a
in their own right. Thus, regulations are less authoritative than the Code itself. However, because
a a a a a a a a a a a a a a a
Congress authorized the Treasury to write regulations, they are the government‘s official
a a a a a a a a a a a a
interpretation of statutory law. Practically, the regulations carry considerable authoritative
a a a a a a a a a a
weight.
a
Application Problems a
1. a. The statement of facts identifies three taxpayers: Mr. Josh Kenney, JK Services, and JK
a a a a a a a a a a a a a
Realty.
a
b. The government of the locality in which Mr. Kenney resides, the state government of
a a a a a a a a a a a a a
Vermont, and the U.S. government have jurisdiction to tax Mr. Kenney. The local
a a a a a a a a a a a a a
governments of the four counties in which JK Services conducts business, the state
a a a a a a a a n a a a a
government of Vermont, and the U.S. government have jurisdiction to tax JK
a a a a a a a a a a a a
Services. The city of Boston, the state government of Massachusetts, and the U.S.
a a a a a a a a a a a a a
government have jurisdiction to tax JK Realty.
a a a a a a a
2. a. The United States has jurisdiction to tax Mrs. May because she is a permanent resident.
a a a a a a a a a a a a a a
b. The United States has jurisdiction to tax Mrs. May only on the U.S. source rental
a a a a a a a a a a a a a a
income generated by the Manhattan real estate.
a a a a a a a
Copyright a©2020 aMcGraw-Hill aEducation. a All arights areserved.
No areproduction aor adistribution awithout athe aprior awritten aconsent a of aMcGraw-
Hill aEducation.
, c. The United States does not have jurisdiction to tax Mrs. May.
a a a a a a a a a a
d. The United States has jurisdiction to tax Mrs. May because she is a U.S. citizen.
a a a a a a a a a a a a a a
3. a. The United States has jurisdiction to tax Mr. Tompkin because he is a U.S citizen.
a a a a a a a a a a a a a a
b. The United States has jurisdiction to tax Mr. Tompkin only on the U.S. source rental
a a a a a a a a a a a a a a
income generated by the Buffalo real estate.
a a a a a a a
c. The United States has jurisdiction to tax Mr. Tompkin because he is a permanent resident.
a a a a a a a a a a a a a a
d. The United States has jurisdiction to tax Mr. Tompkin on his share of the U.S.
a a a a a a a a a a a a a a
source business income generated by Sophic Partnership.
a a a a a a a
4. State A: a
Volume of sales before rate increase a a a a a $800,000,000
Original tax rate a a .05
Revenue before rate increase a a a $40,000,000
Volume of sales after rate increase a a a a a $710,000,000
New tax rate a a .06
Revenue after rate increase a a a $42,600,000
Additional revenue ($42,600,000 −$40,000,000) a a a $2,600,000
State Z: a
Volume of sales added to tax base a a a a a a $50,000,000
Tax rate a .05
Additional revenue a $2,500,000
5. a. The property tax is $8,300 ($415,000 2%).
a a a a a a a
b. The property tax is $19,000 ([$500,000 2%] + [$225,000 4%]).
a a a a a a a a a a a
6. a. The property tax is $39,000 ($1.3 million 3%).
a a a a a a a a
b. The property tax is $85,000 ([$2 million 3%] + [$2.5 million 1%]).
a a a a a a a a a a a a a
7. Increase in County G‘s aggregate assessed property tax value
a a a a a a a a $23,000,000
aAssessed value of Lexon‘s new facility
a a a a a (20,000,000)
Net increase in County G‘s tax base
a a a a a a $3,000,000
aTax ratea
.04
Net effect on County G‘s current year revenue
a a a a a a a $120,000
8. a. Value of property purchased in State K
a a a a a a $600,000
Use tax rate in State H
a a a a a a
.06
Pre credit use tax
a a a $36,000
Sales tax paid to State K
a a a a a (18,000)
Use tax owed to State H
a a a a a $18,000
b. Value of property purchased in State L
a a a a a a $750,000
Use tax rate in State H
a a a a a a
.06
Copyright a©2020 aMcGraw-Hill aEducation. a All arights areserved.
No areproduction aor adistribution awithout athe aprior awritten aconsent a of aMcGraw-
Hill aEducation.
, Pre credit use tax
a a a $45,000
Sales tax paid to State L
a a a a a (48,750)
Use tax owed to State H
a a a a a -0-
Copyright a©2020 aMcGraw-Hill aEducation. a All arights areserved.
No areproduction aor adistribution awithout athe aprior awritten aconsent a of aMcGraw-
Hill aEducation.
PrinciplesofTaxation forBusinessandInvestment Planning 202023rd Edition by a a a a a a
aSally Jones, Shelley Rhoades Catanach
a a a a
Chapter1 Taxes and Taxing Jurisdictions
a a a a
Questionsand Problems forDiscussion a a
1. Tax payments differ from government fines and penalties because they aren‘t intended to
a a a a a a a a a a a a
adeter or punish unacceptable behavior. Tax payments differ from fees or user charges
a a a a a a a a a a a a
abecause they don‘t entitle the payer to a specific government good or service, such as a
a a a a a a a a a a a a a a a
apostage stamp or a driver‘s license. Tax payments also differ from fees or user charges
a a a a a a a a a a a a a a
abecause they are compulsory. a a a
2. This payment has characteristics of a tax, a penalty, and a user fee. The compulsory payment
a a a a a a a a a a a a a a a
a is not specifically punitive but does apply selectively to those companies most likely responsible
a a a a a a a a a a a a a
afor the polluted condition of Green River. However, these same companies may be the entities
a a a a a a a a a a a a a a a
athat benefit most from the environmental clean-up.
a a a a a a
3. This payment more closely resembles a fee for a government service than a transaction-based tax
a a a a a a a a a a a a a a
abecause the transaction occurs between a private party and the jurisdiction itself, rather than
a a a a a a a a a a a a a a
abetween private parties engaging in a market transaction. The payment also entitles the payer to
a a a a a a a a a a a a a a
aa specific benefit (the right to marry under law).
a a a a a a a a
4. To the extent that the decline in exterior maintenance reduces the value of Mr. Powell‘s
a a a a a a a a a a a a a a
aapartment complex, he bears the incidence of the increased property tax. To the extent that the
a a a a a a a a a a a a a a a
adecline reduces the value of adjoining properties or makes the neighborhood less attractive,
a a a a a a a a a a a a
athe owners of the adjoining properties and the neighborhood residents share the incidence of
a a a a a a a a a a a a a
athe tax increase.
a a
5. People who don‘t directly use public schools (such as Mr. and Mrs. Ahern or people who don‘t have
a a a a a a a a a a a a a a a a a
achildren) indirectly benefit from a public education system for the general population. Arguably,
a a a a a a a a a a a a
apublic education contributes to a skilled workforce and improves the cultural and social
a a a a a a a a a a a a
aenvironment in which Mr. and Mrs. Ahern live. Based on this argument, Mr. and Mrs. Ahern should
a a a a a a a a a a a a a a a a
anot be exempt from the local property tax.
a a a a a a a
6. The consumers who pay the same price for a smaller bar of soap of lesser quality bear the
a a a a a a a a a a a a a a a a a
aincidence of the new gross receipts tax. a a a a a a
7. Real property can‘t be hidden or moved, and its ownership (legal title) is a matter of public
a a a a a a a a a a a a a a a a
arecord. In contrast, personal property is mobile and may be easily concealed. Moreover,
a a a a a a a a a a a a
ajurisdictions may not have an effective means to discover or trace ownership of personal
a a a a a a a a a a a a a
aproperty.
8. Arguably, private golf courses beautify the locality and are environmentally more desirable than
a a a a a a a a a a a a
aother commercial activities. They also may require more acreage than other businesses and,
a a a a a a a a a a a a
atherefore, would be at a competitive disadvantage without a preferential real property
a a a a a a a a a a a
atax rate.
a
9. Many jurisdictions that levy property taxes provide an exemption for public institutions, such as
a a a a a a a a a a a a a
astate universities or private colleges. If University K is entitled to such an exemption, every
a a a a a a a a a a a a a a
acommercial building or residence acquired by the University reduces the local jurisdiction‘s
a a a a a a a a a a a
aproperty tax base. a a
Copyright a©2020 aMcGraw-Hill aEducation. a All arights areserved.
No areproduction aor adistribution awithout athe aprior awritten aconsent a of aMcGraw-
Hill aEducation.
,10. Excise taxes are imposed on a much narrower range of consumer goods and services than
a a a a a a a a a a a a a a
sales taxes. Consequently, people can more readily avoid purchasing the specific good
a a a a a a a a a a a a
or service subject to excise tax.
a a a a a a
11. The tax increase may have reduced the aggregate demand for consumer goods and,
a a a a a a a a a a a a
consequently, municipal residents are buying fewer goods. A second possibility is that
a a a a a a a a n a a a
municipal residents are traveling to other jurisdictions with lower tax rates or making
a a a a a a a a a a a a a
more purchases through mail order catalogs or on-line.
a a a a a a a a
12. From a political perspective, liquor and cigarettes sales make an excellent tax base because
a a a a a a a a a a a a a
consumption of the two products is purely discretionary, and any decline in consumption
a a a a a a a a a a a a a
because of the tax is socially desirable. From an economic perspective, these sales are a good
a a a a a a a a a a a a a a a a
tax base because the demand for liquor and cigarettes is relatively price inelastic. In other
a a a a a a a a a a a a a a a
words, people who drink and smoke on a regular basis buy these products regardless of a heavy
a a a a a a a a a a a a a a a a a
excise tax.
a a
13. The federal income has the broader base. The federal payroll tax is imposed on wages, salaries,
a a a a a a a a a a a a a a a
and other forms of compensation earned by employees. The federal income tax is imposed on
a a a a a a a a a a a a a a a
all types of compensation as well as net business profit, investment income, and any other
a a a a a a a a a a a a a a a
income item from whatever source derived.
a a a a a a
14. A property tax is a periodic (usually annual) tax levied on the ownership of property and
a a a a a a a a a a a a a a a
based on the value of the property on a particular assessment date. A transfer tax is a
a a a a a a a a a a a a a a a a a
transaction- based tax levied on the transfer of property from one party to another. A transfer tax
a a a a a a a a a a a a a a a a a
is based on the value of the property at date of transfer.
a a a a a a a a a a a a
15. If the federal government could ―piggy back‖ a national sales tax on existing state sales tax
a a a a a a a a a a a a a a a
collection systems, the federal government could avoid creating a new federal agency for
a a a a a a a a a a a a a
collecting the tax. In contrast, the federal government would have to create a new collection
a a a a a a a a a a a a a a a
system for a national VAT. However, a national VAT would be less likely to cause jurisdictional
a a a a a a a a a a a a a a a a
conflict between the federal government and the states because states don‘t depend on VATs
a a a a a a a a a a a a a a
as a source of revenue.
a a a a a
16. The Internal Revenue Code is federal statutory law, enacted by Congress and signed by the
a a a a a a a a a a a a a a
President. Technically, Treasury regulations only interpret and explain the statute and aren‘t laws
a a a a a a a a a a a a a
in their own right. Thus, regulations are less authoritative than the Code itself. However, because
a a a a a a a a a a a a a a a
Congress authorized the Treasury to write regulations, they are the government‘s official
a a a a a a a a a a a a
interpretation of statutory law. Practically, the regulations carry considerable authoritative
a a a a a a a a a a
weight.
a
Application Problems a
1. a. The statement of facts identifies three taxpayers: Mr. Josh Kenney, JK Services, and JK
a a a a a a a a a a a a a
Realty.
a
b. The government of the locality in which Mr. Kenney resides, the state government of
a a a a a a a a a a a a a
Vermont, and the U.S. government have jurisdiction to tax Mr. Kenney. The local
a a a a a a a a a a a a a
governments of the four counties in which JK Services conducts business, the state
a a a a a a a a n a a a a
government of Vermont, and the U.S. government have jurisdiction to tax JK
a a a a a a a a a a a a
Services. The city of Boston, the state government of Massachusetts, and the U.S.
a a a a a a a a a a a a a
government have jurisdiction to tax JK Realty.
a a a a a a a
2. a. The United States has jurisdiction to tax Mrs. May because she is a permanent resident.
a a a a a a a a a a a a a a
b. The United States has jurisdiction to tax Mrs. May only on the U.S. source rental
a a a a a a a a a a a a a a
income generated by the Manhattan real estate.
a a a a a a a
Copyright a©2020 aMcGraw-Hill aEducation. a All arights areserved.
No areproduction aor adistribution awithout athe aprior awritten aconsent a of aMcGraw-
Hill aEducation.
, c. The United States does not have jurisdiction to tax Mrs. May.
a a a a a a a a a a
d. The United States has jurisdiction to tax Mrs. May because she is a U.S. citizen.
a a a a a a a a a a a a a a
3. a. The United States has jurisdiction to tax Mr. Tompkin because he is a U.S citizen.
a a a a a a a a a a a a a a
b. The United States has jurisdiction to tax Mr. Tompkin only on the U.S. source rental
a a a a a a a a a a a a a a
income generated by the Buffalo real estate.
a a a a a a a
c. The United States has jurisdiction to tax Mr. Tompkin because he is a permanent resident.
a a a a a a a a a a a a a a
d. The United States has jurisdiction to tax Mr. Tompkin on his share of the U.S.
a a a a a a a a a a a a a a
source business income generated by Sophic Partnership.
a a a a a a a
4. State A: a
Volume of sales before rate increase a a a a a $800,000,000
Original tax rate a a .05
Revenue before rate increase a a a $40,000,000
Volume of sales after rate increase a a a a a $710,000,000
New tax rate a a .06
Revenue after rate increase a a a $42,600,000
Additional revenue ($42,600,000 −$40,000,000) a a a $2,600,000
State Z: a
Volume of sales added to tax base a a a a a a $50,000,000
Tax rate a .05
Additional revenue a $2,500,000
5. a. The property tax is $8,300 ($415,000 2%).
a a a a a a a
b. The property tax is $19,000 ([$500,000 2%] + [$225,000 4%]).
a a a a a a a a a a a
6. a. The property tax is $39,000 ($1.3 million 3%).
a a a a a a a a
b. The property tax is $85,000 ([$2 million 3%] + [$2.5 million 1%]).
a a a a a a a a a a a a a
7. Increase in County G‘s aggregate assessed property tax value
a a a a a a a a $23,000,000
aAssessed value of Lexon‘s new facility
a a a a a (20,000,000)
Net increase in County G‘s tax base
a a a a a a $3,000,000
aTax ratea
.04
Net effect on County G‘s current year revenue
a a a a a a a $120,000
8. a. Value of property purchased in State K
a a a a a a $600,000
Use tax rate in State H
a a a a a a
.06
Pre credit use tax
a a a $36,000
Sales tax paid to State K
a a a a a (18,000)
Use tax owed to State H
a a a a a $18,000
b. Value of property purchased in State L
a a a a a a $750,000
Use tax rate in State H
a a a a a a
.06
Copyright a©2020 aMcGraw-Hill aEducation. a All arights areserved.
No areproduction aor adistribution awithout athe aprior awritten aconsent a of aMcGraw-
Hill aEducation.
, Pre credit use tax
a a a $45,000
Sales tax paid to State L
a a a a a (48,750)
Use tax owed to State H
a a a a a -0-
Copyright a©2020 aMcGraw-Hill aEducation. a All arights areserved.
No areproduction aor adistribution awithout athe aprior awritten aconsent a of aMcGraw-
Hill aEducation.
