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