Complete Solutions Manual
Scholes and Wolfson’s
Taxes and Business Strategy
A Planning Approach
Sixth Edition
Merle Erickson
Michelle Hanlon
Ed Maydew
Terry Shevlin
, CONTENTS
Chapter 1 Introduction to Tax Strategy 5
Chapter 2 Tax-Planning Fundamentals 13
Chapter 3 Returns on Alternative Savings Vehicles 24
Chapter 4 Implicit Taxes and Clienteles, Marginal Tax Rates, and Arbitrage 36
Chapter 5 Choosing the Optimal Organizational Form 55
Chapter 6 Corporations: Formation, Operation, Capital Structure, and Liquidation 76
Chapter 7 Nontax Costs of Tax Planning 79
Chapter 8 Compensation Planning 94
Chapter 9 Pension and Retirement Planning 108
Chapter 10 Multinational Tax Planning 125
Chapter 11 Introduction to Mergers, Acquisitions, and Divestitures 129
Chapter 12 Taxable Acquisitions of Freestanding C Corporations 131
Chapter 13 Taxable Acquisitions of S Corporations 135
Chapter 14 Tax-Free Acquisitions of Freestanding C Corporations 143
Chapter 15 Tax Planning for Divestitures 150
Chapter 16 Estate and Gift Tax Planning 155
,
, Chapter 1
Introduction to Tax Strategy
Questions
Q1-1. When facing a business decision in which taxes play a role, a planner employing efficient tax
planning considers all of the costs, tax and nontax, that will be incurred by all of the parties to the
transaction. In addition to the explicit tax payments that will result from the transaction, the
planner considers implicit taxes that parties will pay in the form of lower before-tax rates of
return on tax-favored investments as well as any other non-tax costs associated with the
transaction such as the costs of restructuring an organization to obtain favorable tax treatment. A
planner whose criterion is tax minimization, on the other hand, ignores many of these costs. A tax
minimizer considers only explicit tax costs. It is easy to see that such a criterion may not result in
desirable business strategies when one considers that zero taxes are paid on unprofitable
investments.
Q1-2. Social planners should encourage taxpayers to engage in costly tax planning when no alternative
means of attaining the same social goals is less costly. For example, consider the social goal of
providing low-income housing. A system of tax subsidies to providers of this housing may
require some taxpayers to incur costs in considering the explicit taxes, implicit taxes, and nontax
costs that would affect them and other parties if they were to build low-income housing. If the
next-best alternative means of providing low-income housing is for the government to build it
directly, the social costs associated with providing this housing may be higher.
Q1-3. Examples of tax-favored investments include tax-exempt bonds, business equipment eligible for
accelerated depreciation or immediate expensing, energy-related investments (that obtain tax
credits and other special treatment), research and development, investments in Opportunity Zones
after the TCJA, foreign export activities, retirement and college saving, and entrepreneurial risk-
taking activities.
a. Implicit taxes arise because before-tax rates of return on tax-favored assets are less than those
available on tax-disfavored assets. This occurs because investors bid up the price of the tax-
favored investment. Yes, many investments that are tax-favored (in terms of explicit tax) bear
an implicit tax.
b. High tax-bracket taxpayers should undertake these investments rather than paying high
explicit taxes on investments with higher before tax rates of return but lower after-tax rates of
return. Many of these investors do indeed undertake these investments, but nontax
considerations also impede their propensity to do so. Later chapters elaborate on how
taxpayers determine whether they are in this clientele.
Solutions Manual © 2020
Taxes and Business Strategy, 6th Edition pg. 5
Scholes and Wolfson’s
Taxes and Business Strategy
A Planning Approach
Sixth Edition
Merle Erickson
Michelle Hanlon
Ed Maydew
Terry Shevlin
, CONTENTS
Chapter 1 Introduction to Tax Strategy 5
Chapter 2 Tax-Planning Fundamentals 13
Chapter 3 Returns on Alternative Savings Vehicles 24
Chapter 4 Implicit Taxes and Clienteles, Marginal Tax Rates, and Arbitrage 36
Chapter 5 Choosing the Optimal Organizational Form 55
Chapter 6 Corporations: Formation, Operation, Capital Structure, and Liquidation 76
Chapter 7 Nontax Costs of Tax Planning 79
Chapter 8 Compensation Planning 94
Chapter 9 Pension and Retirement Planning 108
Chapter 10 Multinational Tax Planning 125
Chapter 11 Introduction to Mergers, Acquisitions, and Divestitures 129
Chapter 12 Taxable Acquisitions of Freestanding C Corporations 131
Chapter 13 Taxable Acquisitions of S Corporations 135
Chapter 14 Tax-Free Acquisitions of Freestanding C Corporations 143
Chapter 15 Tax Planning for Divestitures 150
Chapter 16 Estate and Gift Tax Planning 155
,
, Chapter 1
Introduction to Tax Strategy
Questions
Q1-1. When facing a business decision in which taxes play a role, a planner employing efficient tax
planning considers all of the costs, tax and nontax, that will be incurred by all of the parties to the
transaction. In addition to the explicit tax payments that will result from the transaction, the
planner considers implicit taxes that parties will pay in the form of lower before-tax rates of
return on tax-favored investments as well as any other non-tax costs associated with the
transaction such as the costs of restructuring an organization to obtain favorable tax treatment. A
planner whose criterion is tax minimization, on the other hand, ignores many of these costs. A tax
minimizer considers only explicit tax costs. It is easy to see that such a criterion may not result in
desirable business strategies when one considers that zero taxes are paid on unprofitable
investments.
Q1-2. Social planners should encourage taxpayers to engage in costly tax planning when no alternative
means of attaining the same social goals is less costly. For example, consider the social goal of
providing low-income housing. A system of tax subsidies to providers of this housing may
require some taxpayers to incur costs in considering the explicit taxes, implicit taxes, and nontax
costs that would affect them and other parties if they were to build low-income housing. If the
next-best alternative means of providing low-income housing is for the government to build it
directly, the social costs associated with providing this housing may be higher.
Q1-3. Examples of tax-favored investments include tax-exempt bonds, business equipment eligible for
accelerated depreciation or immediate expensing, energy-related investments (that obtain tax
credits and other special treatment), research and development, investments in Opportunity Zones
after the TCJA, foreign export activities, retirement and college saving, and entrepreneurial risk-
taking activities.
a. Implicit taxes arise because before-tax rates of return on tax-favored assets are less than those
available on tax-disfavored assets. This occurs because investors bid up the price of the tax-
favored investment. Yes, many investments that are tax-favored (in terms of explicit tax) bear
an implicit tax.
b. High tax-bracket taxpayers should undertake these investments rather than paying high
explicit taxes on investments with higher before tax rates of return but lower after-tax rates of
return. Many of these investors do indeed undertake these investments, but nontax
considerations also impede their propensity to do so. Later chapters elaborate on how
taxpayers determine whether they are in this clientele.
Solutions Manual © 2020
Taxes and Business Strategy, 6th Edition pg. 5
