SOLUTION MANUAL FOR 8 i 8 i
TaxationforDecisionMakers2017thEdition byShirleyDennis- Escoffier,
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Karen A. Fortin
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Chapter1-12 8i
SolutionstoChapter1ProblemAssignments i
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8 i
8 i
8 i
8
Check Your Understanding 8i 8i
1. [LO1.1] What is a tax?
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Solution: A tax is a required payment to a governmental unit to support its operations that is not
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related to the value of goods or services the person or business receives. Afine is levied as
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a result of an unlawful act. 8i 8i 8i 8i 8i 8i
2. [LO 1.1] Constitutional Authority
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Solution: The federal income tax system as we know it today did not begin until 1913 when the 16th
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Amendment to the U.S. Constitution was ratified. The 16th Amendment gaveCongress
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thepowertolayandcollecttaxes―onincome,fromwhateversource derived,‖ without the
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previous requirement that all direct taxes be imposed based on population.
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3. [LO1.1] Current Tax Code
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Solution: The Tax ReformAct of 1986 was so extensive, the Code was renamedthe Internal
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Revenue Code of 1986. Any current changes to the tax laws are now amendments to the
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Internal Revenue Code of 1986. 8i 8i 8i 8i 8i
4. [LO 1.1] Tax Expenditures
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Solution: Tax expenditures can take the form of special exclusions, deductions, credits or
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preferential rates forspecificactivities.Thesetax expenditures resultin a reduction in the
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revenue that would be collected under a more comprehensive income tax.
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5. [LO 1.1] SALT 8i 8i
Solution: The practice of state and local taxation is commonlyreferred to as a SALT practice.
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6. [LO1.1] Nexus 8i 8i
Solution: Nexusis the necessarytype and degree of connectionbetween abusiness and the state in
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which it is located for the state to impose a tax on its sales or activities
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7. [LO1.1] State Income Tax
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Solution:Without physical presence within Arizona, the statecannot assess state income tax on
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Suntan Corporation’s sales made to persons or businesses located within Arizona.
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,2
8. [LO1.1] Franchise Tax
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Solution: A franchise tax isan excise tax based on the right to do business or own propertyin a state. It
8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i
is usually determined based on corporate income, however, so would, in effect, simply
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be another name for an income tax. 8i 8i 8i 8i 8i 8i 8i
9. [LO 1.1] State Income Allocation
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Solution: Thethree-factorallocationformulausesa percentageof corporatesales, payroll costs,
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and tangible property allocated to the state.
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10. [LO1.1] Employment Taxes
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Solution: An employee pays the Social Security and Medicare (FICA) tax; the employer also pays
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an equivalent Social Security and Medicare (FICA) tax, but the employer also may have
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to pay an unemployment tax. 8i 8i 8i 8i 8i
11. [LO1.1] Wealth Taxes
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Solution: The most common wealth tax is the real property tax based on the fair market value of
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property owned by an individual or a business.
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12. [LO1.1] Intangible Tax
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Solution: The intangible tax is levied on intangible propertysuch as receivables, stocks, bonds,
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and other forms of investment instruments owned by businesses and individuals.
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13. [LO1.1] Estate and Gift Tax
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Solution: Propertythat is given awayduring a lifetime that exceeds an annual allowance per donee
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is subject to a gift tax; however, the lifetime exemption prevents most gifts from being
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subject to this tax. Once, however, taxable gifts exceed the lifetime exemption, gifts are
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subject to the gift tax. When the person passes away, the remaining property owned at
8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i
death (not previously given away) is now subject to the estate tax. Any gift tax
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exemption not used previouslyby the decedent is then available as an exemption from
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the estate tax. Thus, a decedent’s estate escapes taxation unless his or her total lifetime
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taxable gifts plus taxable transfers at death exceed the lifetime exemption.
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14. [LO1.1] Consumption vs IncomeTax
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Solution: A consumption tax is levied on purchases of goods or services that are going to be used or
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consumed. The most common consumption tax is the sales tax, but the value-added tax
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is another form used in many countries outside the United States. Theincome tax is
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based on the value of moneyor goods that are received, whether it is spent or saved. An
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income tax will tax money that is going to be saved rather than spent while the
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consumption tax only taxes money that is spent. The consumption tax is thought to
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encourage savings. 8i 8i
15. [LO1.1] Wealth Taxes
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Solution: A wealth tax is based on the value of wealth that aperson has at a particular point
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, Chapter 1: AnIntroduction toTaxation 3 8i 8i 8i 8i 8i 8i
in time. The real or personal property taxes are wealth taxes. The wealth transfer tax is
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based on the value of moneyor propertythatis passed on to another person. The estate,
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gift, and inheritance taxes are wealth transfer taxes.
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16. [LO1.1] Use Taxes
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Solution: A use tax isa companion tax to a sales tax that is imposed on propertyto be used in one
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state but which was purchased in another state to which no sales tax was paid on the
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purchase. 8i
17. [LO1.1] Income Taxes
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Solution: Two single personswith taxableincomeof $76,550 each will paythe same total tax as a
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married couple with taxable income of $153,100. Above $153,100 the married couple’s
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rate increases to 28% but each of the single persons does not reach that rate until taxable
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income is over $91,900.
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18. [LO1.2] Types of Taxes
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Solution: The income tax system in the United States is a progressive system; that is, as income
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increases, the tax rate increases and the person pays a greater percentage of incomeasa
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tax. A person who has $9,000 of taxableincome will pay$900 intaxes (10%). A person
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who makes $18,000 will pay$2,233.75 ($932.50 + .15 ($18,000 -
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$9,325). $2,233.75/$18,000 = 12.41%. Aregressivetax system imposes a lowertax rate 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i
as income increases; that is, a person pays a decreasing percentage of their income in
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taxes asincome increases. The Social Securityportion of the FICA tax is a regressive tax;
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as the taxpayer’s income on which the tax is based exceeds a maximum, the tax is no
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longer collected and the rate declines. A proportional tax would collect the same
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percentage of tax on the tax base, regardless of the size of the base. The sales tax is a
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proportional tax as the same percent tax is collected regardless of the amount spent.
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19. [LO 1.2] Income Tax Rates
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Solution: Individuals have basic tax rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% that
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applyto their ordinaryincome and their interest income. The basic tax ratesfor their
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dividend income are 0%, 15%, and 20%. Corporations have no tax-favored incomes so
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they pay tax on all income at rates of 15%, 25%, 34%, and 35%, excluding surtaxes on
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certain portions of income that ultimately produce a flat tax of 35% on income above
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$18,333,333. 8i
20. [LO 1.2] Income Tax Rates
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Solution: Individual’s short-term capital gains tax rates are the same as the tax rates on ordinary
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income.Asingle individual’s long-termcapital gains rates are 0% on
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long-termcapital gains (LTCG) from 0 to $37,950; 15% on LTCG from $37,951 to 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i
$418,400, and 20% on LTCG exceeding $418,400. 8i 8i 8i 8i 8i 8i
21. [LO 1.3] Canons of Taxation
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Solution: The basic idea of equityisthat persons with similarincomeswillfacesimilar taxes. Thus,
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individuals each with $200,000 in taxable income will pay the same amount
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, 4
of tax. A tax meets the criterionof economywhen the amount of revenue it raises is at an
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optimum level after the costs of administration and compliance are considered. The
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canon of certainty would dictate that a taxpayer know with reasonable accuracy the tax
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consequences of a transaction at the time the transaction takes place. The last canon of
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convenience states that a convenient tax is one that would be readily determined and
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paid with little effort.
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22. [LO1.3] Equity Concepts
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Solution: Horizontal equity would require persons with equal incomes pay equal amounts of taxes.
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Vertical equity would require persons with higher incomes to pay a higher percentageof
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their incomethan persons with lower incomes. This is the basis of the
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U.S. tax system. 8i 8i
23. [LO 1.4] Taxable Persons
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Solution: Onlyindividuals,regular (or C) corporations, and fiduciaries(estates and trusts) pay
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income taxes.
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24. [LO1.4] Gross Income
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Solution: The termgross income isan all-inclusiveterm that includes incomefrom all sources that
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are not specifically excluded.
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25. [LO1.4] Basic Tax Model
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Solution: The basic elements of the tax model are gross income, less deductions, that equal taxable
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income or loss. The applicable tax rate is applied to this to determine the grosstax
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liability. Fromthis tax credits andprepayments aredeductedto determine the tax liability
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owed or the refund due.
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26. [LO 1.4] Capital Losses
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Solution: An individual may deduct up to $3,000 of capital losses in excess of capital gains
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annually; the excess may be carried forward indefinitely to succeeding years. A
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corporation can only offset capital losses against capital gains; losses are not deductible
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againstotherincome.Instead thecorporation first carries thelosses back to the three
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previous years and then forward for 5 years.
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27. [LO 1.4] Basic Income Tax Rates
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Solution: Individuals have basic tax rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% that are
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appliedto their ordinaryincome.A corporation’s basic tax ratesare 15%, 25%, 34%, and
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35%, excluding surtaxes.
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28. [LO 1.4] Fiduciaries
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Solution: Trusts and estates are two fiduciaryentities; a trust isestablished bya grantorwho
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appoints a trustee to manage the assets for the benefit of the trust’s beneficiaries. An
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estate is an entity that is created on the death of a person that provides management for
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the assets in the decedent’s estate until they can be distributed to the beneficiaries. A
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grantor is the person who creates the trust when assets are placed in the trust for the
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benefit of the beneficiaries. The trustee is the person
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TaxationforDecisionMakers2017thEdition byShirleyDennis- Escoffier,
8i 8i 8i 8i 8i 8i 8i 8i 8i
Karen A. Fortin
8i 8i 8i
Chapter1-12 8i
SolutionstoChapter1ProblemAssignments i
8 i
8 i
8 i
8 i
8
Check Your Understanding 8i 8i
1. [LO1.1] What is a tax?
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Solution: A tax is a required payment to a governmental unit to support its operations that is not
8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i
related to the value of goods or services the person or business receives. Afine is levied as
8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i
a result of an unlawful act. 8i 8i 8i 8i 8i 8i
2. [LO 1.1] Constitutional Authority
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Solution: The federal income tax system as we know it today did not begin until 1913 when the 16th
8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i
Amendment to the U.S. Constitution was ratified. The 16th Amendment gaveCongress
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thepowertolayandcollecttaxes―onincome,fromwhateversource derived,‖ without the
8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i
previous requirement that all direct taxes be imposed based on population.
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3. [LO1.1] Current Tax Code
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Solution: The Tax ReformAct of 1986 was so extensive, the Code was renamedthe Internal
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Revenue Code of 1986. Any current changes to the tax laws are now amendments to the
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Internal Revenue Code of 1986. 8i 8i 8i 8i 8i
4. [LO 1.1] Tax Expenditures
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Solution: Tax expenditures can take the form of special exclusions, deductions, credits or
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preferential rates forspecificactivities.Thesetax expenditures resultin a reduction in the
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revenue that would be collected under a more comprehensive income tax.
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5. [LO 1.1] SALT 8i 8i
Solution: The practice of state and local taxation is commonlyreferred to as a SALT practice.
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6. [LO1.1] Nexus 8i 8i
Solution: Nexusis the necessarytype and degree of connectionbetween abusiness and the state in
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which it is located for the state to impose a tax on its sales or activities
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7. [LO1.1] State Income Tax
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Solution:Without physical presence within Arizona, the statecannot assess state income tax on
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Suntan Corporation’s sales made to persons or businesses located within Arizona.
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,2
8. [LO1.1] Franchise Tax
8i 8i 8i
Solution: A franchise tax isan excise tax based on the right to do business or own propertyin a state. It
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is usually determined based on corporate income, however, so would, in effect, simply
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be another name for an income tax. 8i 8i 8i 8i 8i 8i 8i
9. [LO 1.1] State Income Allocation
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Solution: Thethree-factorallocationformulausesa percentageof corporatesales, payroll costs,
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and tangible property allocated to the state.
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10. [LO1.1] Employment Taxes
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Solution: An employee pays the Social Security and Medicare (FICA) tax; the employer also pays
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an equivalent Social Security and Medicare (FICA) tax, but the employer also may have
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to pay an unemployment tax. 8i 8i 8i 8i 8i
11. [LO1.1] Wealth Taxes
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Solution: The most common wealth tax is the real property tax based on the fair market value of
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property owned by an individual or a business.
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12. [LO1.1] Intangible Tax
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Solution: The intangible tax is levied on intangible propertysuch as receivables, stocks, bonds,
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and other forms of investment instruments owned by businesses and individuals.
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13. [LO1.1] Estate and Gift Tax
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Solution: Propertythat is given awayduring a lifetime that exceeds an annual allowance per donee
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is subject to a gift tax; however, the lifetime exemption prevents most gifts from being
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subject to this tax. Once, however, taxable gifts exceed the lifetime exemption, gifts are
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subject to the gift tax. When the person passes away, the remaining property owned at
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death (not previously given away) is now subject to the estate tax. Any gift tax
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exemption not used previouslyby the decedent is then available as an exemption from
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the estate tax. Thus, a decedent’s estate escapes taxation unless his or her total lifetime
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taxable gifts plus taxable transfers at death exceed the lifetime exemption.
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14. [LO1.1] Consumption vs IncomeTax
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Solution: A consumption tax is levied on purchases of goods or services that are going to be used or
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consumed. The most common consumption tax is the sales tax, but the value-added tax
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is another form used in many countries outside the United States. Theincome tax is
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based on the value of moneyor goods that are received, whether it is spent or saved. An
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income tax will tax money that is going to be saved rather than spent while the
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consumption tax only taxes money that is spent. The consumption tax is thought to
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encourage savings. 8i 8i
15. [LO1.1] Wealth Taxes
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Solution: A wealth tax is based on the value of wealth that aperson has at a particular point
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, Chapter 1: AnIntroduction toTaxation 3 8i 8i 8i 8i 8i 8i
in time. The real or personal property taxes are wealth taxes. The wealth transfer tax is
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based on the value of moneyor propertythatis passed on to another person. The estate,
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gift, and inheritance taxes are wealth transfer taxes.
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16. [LO1.1] Use Taxes
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Solution: A use tax isa companion tax to a sales tax that is imposed on propertyto be used in one
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state but which was purchased in another state to which no sales tax was paid on the
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purchase. 8i
17. [LO1.1] Income Taxes
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Solution: Two single personswith taxableincomeof $76,550 each will paythe same total tax as a
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married couple with taxable income of $153,100. Above $153,100 the married couple’s
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rate increases to 28% but each of the single persons does not reach that rate until taxable
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income is over $91,900.
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18. [LO1.2] Types of Taxes
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Solution: The income tax system in the United States is a progressive system; that is, as income
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increases, the tax rate increases and the person pays a greater percentage of incomeasa
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tax. A person who has $9,000 of taxableincome will pay$900 intaxes (10%). A person
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who makes $18,000 will pay$2,233.75 ($932.50 + .15 ($18,000 -
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$9,325). $2,233.75/$18,000 = 12.41%. Aregressivetax system imposes a lowertax rate 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i
as income increases; that is, a person pays a decreasing percentage of their income in
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taxes asincome increases. The Social Securityportion of the FICA tax is a regressive tax;
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as the taxpayer’s income on which the tax is based exceeds a maximum, the tax is no
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longer collected and the rate declines. A proportional tax would collect the same
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percentage of tax on the tax base, regardless of the size of the base. The sales tax is a
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proportional tax as the same percent tax is collected regardless of the amount spent.
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19. [LO 1.2] Income Tax Rates
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Solution: Individuals have basic tax rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% that
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applyto their ordinaryincome and their interest income. The basic tax ratesfor their
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dividend income are 0%, 15%, and 20%. Corporations have no tax-favored incomes so
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they pay tax on all income at rates of 15%, 25%, 34%, and 35%, excluding surtaxes on
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certain portions of income that ultimately produce a flat tax of 35% on income above
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$18,333,333. 8i
20. [LO 1.2] Income Tax Rates
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Solution: Individual’s short-term capital gains tax rates are the same as the tax rates on ordinary
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income.Asingle individual’s long-termcapital gains rates are 0% on
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long-termcapital gains (LTCG) from 0 to $37,950; 15% on LTCG from $37,951 to 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i 8i
$418,400, and 20% on LTCG exceeding $418,400. 8i 8i 8i 8i 8i 8i
21. [LO 1.3] Canons of Taxation
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Solution: The basic idea of equityisthat persons with similarincomeswillfacesimilar taxes. Thus,
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individuals each with $200,000 in taxable income will pay the same amount
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, 4
of tax. A tax meets the criterionof economywhen the amount of revenue it raises is at an
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optimum level after the costs of administration and compliance are considered. The
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canon of certainty would dictate that a taxpayer know with reasonable accuracy the tax
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consequences of a transaction at the time the transaction takes place. The last canon of
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convenience states that a convenient tax is one that would be readily determined and
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paid with little effort.
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22. [LO1.3] Equity Concepts
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Solution: Horizontal equity would require persons with equal incomes pay equal amounts of taxes.
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Vertical equity would require persons with higher incomes to pay a higher percentageof
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their incomethan persons with lower incomes. This is the basis of the
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U.S. tax system. 8i 8i
23. [LO 1.4] Taxable Persons
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Solution: Onlyindividuals,regular (or C) corporations, and fiduciaries(estates and trusts) pay
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income taxes.
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24. [LO1.4] Gross Income
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Solution: The termgross income isan all-inclusiveterm that includes incomefrom all sources that
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are not specifically excluded.
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25. [LO1.4] Basic Tax Model
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Solution: The basic elements of the tax model are gross income, less deductions, that equal taxable
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income or loss. The applicable tax rate is applied to this to determine the grosstax
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liability. Fromthis tax credits andprepayments aredeductedto determine the tax liability
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owed or the refund due.
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26. [LO 1.4] Capital Losses
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Solution: An individual may deduct up to $3,000 of capital losses in excess of capital gains
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annually; the excess may be carried forward indefinitely to succeeding years. A
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corporation can only offset capital losses against capital gains; losses are not deductible
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againstotherincome.Instead thecorporation first carries thelosses back to the three
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previous years and then forward for 5 years.
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27. [LO 1.4] Basic Income Tax Rates
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Solution: Individuals have basic tax rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% that are
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appliedto their ordinaryincome.A corporation’s basic tax ratesare 15%, 25%, 34%, and
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35%, excluding surtaxes.
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28. [LO 1.4] Fiduciaries
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Solution: Trusts and estates are two fiduciaryentities; a trust isestablished bya grantorwho
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appoints a trustee to manage the assets for the benefit of the trust’s beneficiaries. An
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estate is an entity that is created on the death of a person that provides management for
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the assets in the decedent’s estate until they can be distributed to the beneficiaries. A
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grantor is the person who creates the trust when assets are placed in the trust for the
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benefit of the beneficiaries. The trustee is the person
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