SOLUTION MANUAL FOR d d
PrinciplesofTaxationforBusinessandInvestmentPlanning202023rdEditionby
SallyJones,ShelleyRhoadesCatanach
d
Chapter1TaxesandTaxingJurisdictions
Questionsand ProblemsforDiscussion
d
1. Taxpaymentsdifferfromgovernmentf inesandpenaltiesbecausetheyaren‘ti ntendedt
e e e d e e e d e
d odeter orpunishunacceptablebehavior.Taxpaymentsdifferfromfeesorusercharges
d e
dbecause
dtheydon‘tentitlethepayertoaspecificgovernmentgoodorservice,suchasapostagestamp e
doradriver‘slicense.Taxpaymentsalsodifferfromfeesoruserchargesbecausetheyare e d d
dcompulsory.
2. Thispaymenthascharacteristicsofatax,apenalty,andauserfee.Thecompulsorypayment isnot
e d
dspecificallypunitivebutdoesapplyselectivelytothosecompaniesmostl ikely responsibleforthe e d d
dpollutedconditionofGreenRiver.However,thesesamecompaniesmay bet heentitiest e d e d e e
dhat benefit mostfromtheenvironmentalclean-up.
e d d d
3. Thispaymentmorecloselyresemblesafeeforagovernmentservicethanat ransaction- e d
basedtax
dbecausethetransactionoccursbetweenaprivatepartyandthejurisdictionitself,rather than e d
dbetweenprivatepartiesengagingi na markett e d e e
d ransaction.Thepaymentalsoentitlesthepayertoa specificbenefit(therighttomarryunderlaw). e d d e
4. Totheextentt hatthedeclinei nexteriormaintenancereducesthevalueofMr.Powell‘s
e d e d e
dapartment complex,hebearsthei ncidenceoftheincreasedpropertytax.Totheextentt
d e d e e
d hatthedeclinereduces
dthevalueofadjoiningpropertiesormakestheneighborhoodlessattractive,theownersofthe
dadjoiningpropertiesandtheneighborhoodresidentssharetheincidenceofthetaxincrease.
5. Peoplewhodon‘tdirectlyusepublicschools(suchasMr.andMrs.Ahernorpeoplewhodon‘thave
e e e
dchildren)indirectlybenefitf romapubliceducationsystemforthegeneralpopulation.Arguably,public e d e d
deducationcontributestoaskilledworkforceandimprovestheculturalandsocialenvironmentinwhich e e
dMr.andMrs.Ahernlive.Basedont
e e e e
dhisargument,Mr.andMrs.Ahernshouldnot beexemptfromthelocal propertytax.
e e e d
6. Theconsumerswhopaythesamepriceforasmallerbarofsoapoflesserqualitybearthe
dincidenceofthenewgrossreceiptstax. d
7. Realpropertycan‘tbehiddenormoved,anditsownership(legalt itle)isamatter ofpublic e d d
drecord.Incontrast,personalpropertyismobileandmaybeeasilyconcealed.Moreover, e d
d jurisdictionsmaynothaveaneffectivemeanst e e e e
d odiscoverortraceownershipofpersonal property. d
8. Arguably,privategolfcoursesbeautifythelocalityandareenvironmentallymoredesirable than d
dothercommercialactivities.Theyalsomayrequiremoreacreagethanotherbusinessesand,
dtherefore, would beat acompetitive disadvantage withouta preferential real
d d d e d d d d
d propertytax rate. d
9. Manyjurisdictionsthatl evypropertytaxesprovideanexemptionf
e d e e
dorpublicinstitutions,suchasstate universitiesorprivatecolleges.IfUniversityKi
e e d e
dsentitledtosuchanexemption,everycommercial
e
dbuildingorresidenceacquiredbytheUniversityreducesthelocaljurisdiction‘spropertytaxbase.
e e d
Copyright©2020McGraw-HillEducation. Allrightsreserved. e d
Noreproductionordistributionwithoutt hepriorwrittenconsent ofMcGraw-Hill
e e d e e d
Education. d
,10. Excisetaxesareimposedonamuchnarrowerrangeofconsumergoodsandservicesthan sales d
taxes. Consequently, people can more readily avoid purchasing the specific good or service
d d d d d d d d d d d d d
subjecttoexcisetax.
d
11. Thet axincrease mayhavereducedt heaggregatedemandforconsumergoodsand,
e d e e e d e e
consequently,municipalresidentsarebuyingfewergoods.A secondpossibilityisthat
d e d
dmunicipalresidentsaretravelingt ootherjurisdictionswithl e e d e e
owertaxratesormakingmore purchasesthroughmail ordercatalogsoron-line.
d e e d d d d
12. Fromapoliticalperspective,liquorandcigarettes salesmakeanexcellentt axbasebecause e e e e e d e
consumptionofthetwoproductsispurelydiscretionary,andanydeclineinconsumptionbecauseof
d e e d
thet axissociallydesirable.Fromaneconomicperspective,thesesalesareagoodtax base
d e d e d
becausethedemandforliquor andcigarettesi srelatively priceinelastic.Inother
d d e d d
words,people
d
whodrinkandsmokeonaregularbasisbuytheseproductsregardlessofaheavyexciset ax.
d e e e e e d
13. Thefederalincomehast hebroaderbase.Thefederalpayrolltaxi simposedonwages, e d e d
salaries,and otherformsofcompensationearnedbyemployees.Thefederalincometaxi
d d e e
simposedonalltypesof compensationaswellasnetbusinessprofit,investmenti
d d e e
ncome,andanyotherincomeitemfrom whateversourcederived.
d d d
14. Apropertytaxisaperiodic(usually annual) taxlevied ontheownershipofproperty andbasedon
e d d d d d d d
thevalueofthepropertyonaparticularassessmentdate.Atransfertaxi sa transaction-
d e e e e d e
basedtax leviedonthetransferofpropertyfromonepartytoanother.At
d e e
ransfertax isbasedonthevalueofthe propertyatdateoftransfer.
d e d e
15. Ifthef ederalgovernmentcould―piggyback‖anationalsalest axonexistingstatesalestax
e d e e e d e
collection
d
systems,thefederalgovernmentcouldavoidcreatinganewfederalagencyforcollectingthetax.In
d e e e
contrast,thefederalgovernmentwouldhavetocreateanewcollectionsystemforanationalVAT.
d e e e e e
However,anationalVATwouldbelesslikelytocausej urisdictionalconflictbetweenthefederal
d e e d e
governmentandthestatesbecausestatesdon‘tdependonVATsasasourceofrevenue.
d e e d d
16. TheInternalRevenueCodeisfederalstatutorylaw,enactedbyCongressandsignedbythePresident.
Technically,Treasuryregulationsonlyinterpretandexplainthestatuteandaren‘tl awsintheirown
d e e d d
right.Thus,regulationsarelessauthoritativethantheCodeitself.However,becauseCongress
d e d
authorizedtheTreasurytowriteregulations,theyarethegovernment‘sofficialinterpretationof
d
statutorylaw.Practically,theregulationscarryconsiderableauthoritativeweight.
d e
Application Problems d
1. a. Thestatementoffactsidentifiesthreetaxpayers:Mr.JoshKenney,JKServices,andJK
e e e e
Realty.
d
b. ThegovernmentofthelocalityinwhichMr.Kenneyresides,thestategovernmentof e
Vermont,andtheU.S.governmenthavejurisdictiontotaxMr.Kenney.Thelocal
d e
governmentsofthefourcountiesinwhichJK Servicesconductsbusiness,thestate
d d e
governmentofVermont,andtheU.S.governmenthavejurisdictiont
d e
otaxJKServices.The
d e
cityofBoston,thestategovernmentofMassachusetts,andtheU.S.governmenthave
d e e e d
jurisdictiontotaxJKRealty.
d d
2. a. TheUnited Stateshasjurisdictiont otaxMrs.Maybecauseshei sapermanentresident.
e e e d e e d e
b. TheUnitedStateshasjurisdictiontot e e e e
axMrs.MayonlyontheU.S.sourcerental incomegeneratedby
d e e e d
theManhattanrealestate.
d d
Copyright©2020McGraw-HillEducation. Allrightsreserved. e d
Noreproductionordistributionwithoutt hepriorwrittenconsent ofMcGraw-Hill
e e d e e d
Education. d
, c. TheUnitedStatesdoesnot havejurisdictiont otax Mrs.May. d e d e d
d. TheUnitedStateshasjurisdictiontotaxMrs.MaybecausesheisaU.S.citizen. e
3. a. TheUnitedStateshasjurisdictiontotaxMr.TompkinbecauseheisaU.Scitizen. e e
b. TheUnitedStateshasj urisdictiontot axMr.Tompkinonlyont
e e e d e e d e e e
heU.S.sourcerental incomegeneratedbytheBuffalorealestate.
d e d d
c. TheUnitedStateshasjurisdictiontotax Mr.Tompkinbecauseheisapermanent
e e e e d resident.
d. TheUnitedStateshasjurisdictiontotaxMr.TompkinonhisshareoftheU.S.
e e e e e
sourcebusinessincomegeneratedbySophic Partnership.
d d d e
4. StateA:
Volumeofsalesbeforerateincrease e $800,000,000
Originaltaxrate e .05
Revenuebeforerateincrease e $40,000,000
Volumeofsalesafter rateincrease e d $710,000,000
Newtax rate d .06
Revenueafterratei ncrease e d $42,600,000
Additional revenue($42,600,000−$40,000,000) e $2,600,000
StateZ:
Volumeofsalesaddedtotax base d $50,000,000
Tax rate e .05
Additionalrevenue $2,500,000
5. a. Thepropertytaxis$8,300($415,0002%).
b. Thepropertytaxis$19,000([$500,000 2%]+[$225,000 4%]). e d e d
6. a. Thepropertytaxi s $39,000($1.3million3%). e d e
b. Thepropertytaxi s$85,000([$2million3%] +[$2.5 million1%]).
e e d e e
7. IncreaseinCounty G‘s aggregateassessedproperty taxvalue d d d d $23,000,000
dAssessedvalueofLexon‘snewfacility (20,000,000)
Net increaseinCountyG‘staxbase
e d d $3,000,000
dTaxrate e
.04
Neteffect onCountyG‘scurrentyearrevenue
d e e $120,000
8. a. ValueofpropertypurchasedinStateK d $600,000
dUsetaxrateinStateH
.06
Precreditusetax
e $36,000
Salest axpaidtoStateK e d d e (18,000)
UsetaxowedtoStateH d $18,000
b. ValueofpropertypurchasedinStateL d $750,000
dUsetaxrateinStateH
.06
Copyright©2020McGraw-HillEducation. Allrightsreserved. e d
Noreproductionordistributionwithoutt hepriorwrittenconsent ofMcGraw-Hill
e e d e e d
Education. d
, Precredit usetax
e e $45,000
Salestaxpaidt oStateL
d e d (48,750)
Usetax owedtoStateH
e -0-
Copyright©2020McGraw-HillEducation. Allrightsreserved.
e d
Noreproductionordistributionwithoutt hepriorwrittenconsent ofMcGraw-Hill
e e d e e d
dEducation.
PrinciplesofTaxationforBusinessandInvestmentPlanning202023rdEditionby
SallyJones,ShelleyRhoadesCatanach
d
Chapter1TaxesandTaxingJurisdictions
Questionsand ProblemsforDiscussion
d
1. Taxpaymentsdifferfromgovernmentf inesandpenaltiesbecausetheyaren‘ti ntendedt
e e e d e e e d e
d odeter orpunishunacceptablebehavior.Taxpaymentsdifferfromfeesorusercharges
d e
dbecause
dtheydon‘tentitlethepayertoaspecificgovernmentgoodorservice,suchasapostagestamp e
doradriver‘slicense.Taxpaymentsalsodifferfromfeesoruserchargesbecausetheyare e d d
dcompulsory.
2. Thispaymenthascharacteristicsofatax,apenalty,andauserfee.Thecompulsorypayment isnot
e d
dspecificallypunitivebutdoesapplyselectivelytothosecompaniesmostl ikely responsibleforthe e d d
dpollutedconditionofGreenRiver.However,thesesamecompaniesmay bet heentitiest e d e d e e
dhat benefit mostfromtheenvironmentalclean-up.
e d d d
3. Thispaymentmorecloselyresemblesafeeforagovernmentservicethanat ransaction- e d
basedtax
dbecausethetransactionoccursbetweenaprivatepartyandthejurisdictionitself,rather than e d
dbetweenprivatepartiesengagingi na markett e d e e
d ransaction.Thepaymentalsoentitlesthepayertoa specificbenefit(therighttomarryunderlaw). e d d e
4. Totheextentt hatthedeclinei nexteriormaintenancereducesthevalueofMr.Powell‘s
e d e d e
dapartment complex,hebearsthei ncidenceoftheincreasedpropertytax.Totheextentt
d e d e e
d hatthedeclinereduces
dthevalueofadjoiningpropertiesormakestheneighborhoodlessattractive,theownersofthe
dadjoiningpropertiesandtheneighborhoodresidentssharetheincidenceofthetaxincrease.
5. Peoplewhodon‘tdirectlyusepublicschools(suchasMr.andMrs.Ahernorpeoplewhodon‘thave
e e e
dchildren)indirectlybenefitf romapubliceducationsystemforthegeneralpopulation.Arguably,public e d e d
deducationcontributestoaskilledworkforceandimprovestheculturalandsocialenvironmentinwhich e e
dMr.andMrs.Ahernlive.Basedont
e e e e
dhisargument,Mr.andMrs.Ahernshouldnot beexemptfromthelocal propertytax.
e e e d
6. Theconsumerswhopaythesamepriceforasmallerbarofsoapoflesserqualitybearthe
dincidenceofthenewgrossreceiptstax. d
7. Realpropertycan‘tbehiddenormoved,anditsownership(legalt itle)isamatter ofpublic e d d
drecord.Incontrast,personalpropertyismobileandmaybeeasilyconcealed.Moreover, e d
d jurisdictionsmaynothaveaneffectivemeanst e e e e
d odiscoverortraceownershipofpersonal property. d
8. Arguably,privategolfcoursesbeautifythelocalityandareenvironmentallymoredesirable than d
dothercommercialactivities.Theyalsomayrequiremoreacreagethanotherbusinessesand,
dtherefore, would beat acompetitive disadvantage withouta preferential real
d d d e d d d d
d propertytax rate. d
9. Manyjurisdictionsthatl evypropertytaxesprovideanexemptionf
e d e e
dorpublicinstitutions,suchasstate universitiesorprivatecolleges.IfUniversityKi
e e d e
dsentitledtosuchanexemption,everycommercial
e
dbuildingorresidenceacquiredbytheUniversityreducesthelocaljurisdiction‘spropertytaxbase.
e e d
Copyright©2020McGraw-HillEducation. Allrightsreserved. e d
Noreproductionordistributionwithoutt hepriorwrittenconsent ofMcGraw-Hill
e e d e e d
Education. d
,10. Excisetaxesareimposedonamuchnarrowerrangeofconsumergoodsandservicesthan sales d
taxes. Consequently, people can more readily avoid purchasing the specific good or service
d d d d d d d d d d d d d
subjecttoexcisetax.
d
11. Thet axincrease mayhavereducedt heaggregatedemandforconsumergoodsand,
e d e e e d e e
consequently,municipalresidentsarebuyingfewergoods.A secondpossibilityisthat
d e d
dmunicipalresidentsaretravelingt ootherjurisdictionswithl e e d e e
owertaxratesormakingmore purchasesthroughmail ordercatalogsoron-line.
d e e d d d d
12. Fromapoliticalperspective,liquorandcigarettes salesmakeanexcellentt axbasebecause e e e e e d e
consumptionofthetwoproductsispurelydiscretionary,andanydeclineinconsumptionbecauseof
d e e d
thet axissociallydesirable.Fromaneconomicperspective,thesesalesareagoodtax base
d e d e d
becausethedemandforliquor andcigarettesi srelatively priceinelastic.Inother
d d e d d
words,people
d
whodrinkandsmokeonaregularbasisbuytheseproductsregardlessofaheavyexciset ax.
d e e e e e d
13. Thefederalincomehast hebroaderbase.Thefederalpayrolltaxi simposedonwages, e d e d
salaries,and otherformsofcompensationearnedbyemployees.Thefederalincometaxi
d d e e
simposedonalltypesof compensationaswellasnetbusinessprofit,investmenti
d d e e
ncome,andanyotherincomeitemfrom whateversourcederived.
d d d
14. Apropertytaxisaperiodic(usually annual) taxlevied ontheownershipofproperty andbasedon
e d d d d d d d
thevalueofthepropertyonaparticularassessmentdate.Atransfertaxi sa transaction-
d e e e e d e
basedtax leviedonthetransferofpropertyfromonepartytoanother.At
d e e
ransfertax isbasedonthevalueofthe propertyatdateoftransfer.
d e d e
15. Ifthef ederalgovernmentcould―piggyback‖anationalsalest axonexistingstatesalestax
e d e e e d e
collection
d
systems,thefederalgovernmentcouldavoidcreatinganewfederalagencyforcollectingthetax.In
d e e e
contrast,thefederalgovernmentwouldhavetocreateanewcollectionsystemforanationalVAT.
d e e e e e
However,anationalVATwouldbelesslikelytocausej urisdictionalconflictbetweenthefederal
d e e d e
governmentandthestatesbecausestatesdon‘tdependonVATsasasourceofrevenue.
d e e d d
16. TheInternalRevenueCodeisfederalstatutorylaw,enactedbyCongressandsignedbythePresident.
Technically,Treasuryregulationsonlyinterpretandexplainthestatuteandaren‘tl awsintheirown
d e e d d
right.Thus,regulationsarelessauthoritativethantheCodeitself.However,becauseCongress
d e d
authorizedtheTreasurytowriteregulations,theyarethegovernment‘sofficialinterpretationof
d
statutorylaw.Practically,theregulationscarryconsiderableauthoritativeweight.
d e
Application Problems d
1. a. Thestatementoffactsidentifiesthreetaxpayers:Mr.JoshKenney,JKServices,andJK
e e e e
Realty.
d
b. ThegovernmentofthelocalityinwhichMr.Kenneyresides,thestategovernmentof e
Vermont,andtheU.S.governmenthavejurisdictiontotaxMr.Kenney.Thelocal
d e
governmentsofthefourcountiesinwhichJK Servicesconductsbusiness,thestate
d d e
governmentofVermont,andtheU.S.governmenthavejurisdictiont
d e
otaxJKServices.The
d e
cityofBoston,thestategovernmentofMassachusetts,andtheU.S.governmenthave
d e e e d
jurisdictiontotaxJKRealty.
d d
2. a. TheUnited Stateshasjurisdictiont otaxMrs.Maybecauseshei sapermanentresident.
e e e d e e d e
b. TheUnitedStateshasjurisdictiontot e e e e
axMrs.MayonlyontheU.S.sourcerental incomegeneratedby
d e e e d
theManhattanrealestate.
d d
Copyright©2020McGraw-HillEducation. Allrightsreserved. e d
Noreproductionordistributionwithoutt hepriorwrittenconsent ofMcGraw-Hill
e e d e e d
Education. d
, c. TheUnitedStatesdoesnot havejurisdictiont otax Mrs.May. d e d e d
d. TheUnitedStateshasjurisdictiontotaxMrs.MaybecausesheisaU.S.citizen. e
3. a. TheUnitedStateshasjurisdictiontotaxMr.TompkinbecauseheisaU.Scitizen. e e
b. TheUnitedStateshasj urisdictiontot axMr.Tompkinonlyont
e e e d e e d e e e
heU.S.sourcerental incomegeneratedbytheBuffalorealestate.
d e d d
c. TheUnitedStateshasjurisdictiontotax Mr.Tompkinbecauseheisapermanent
e e e e d resident.
d. TheUnitedStateshasjurisdictiontotaxMr.TompkinonhisshareoftheU.S.
e e e e e
sourcebusinessincomegeneratedbySophic Partnership.
d d d e
4. StateA:
Volumeofsalesbeforerateincrease e $800,000,000
Originaltaxrate e .05
Revenuebeforerateincrease e $40,000,000
Volumeofsalesafter rateincrease e d $710,000,000
Newtax rate d .06
Revenueafterratei ncrease e d $42,600,000
Additional revenue($42,600,000−$40,000,000) e $2,600,000
StateZ:
Volumeofsalesaddedtotax base d $50,000,000
Tax rate e .05
Additionalrevenue $2,500,000
5. a. Thepropertytaxis$8,300($415,0002%).
b. Thepropertytaxis$19,000([$500,000 2%]+[$225,000 4%]). e d e d
6. a. Thepropertytaxi s $39,000($1.3million3%). e d e
b. Thepropertytaxi s$85,000([$2million3%] +[$2.5 million1%]).
e e d e e
7. IncreaseinCounty G‘s aggregateassessedproperty taxvalue d d d d $23,000,000
dAssessedvalueofLexon‘snewfacility (20,000,000)
Net increaseinCountyG‘staxbase
e d d $3,000,000
dTaxrate e
.04
Neteffect onCountyG‘scurrentyearrevenue
d e e $120,000
8. a. ValueofpropertypurchasedinStateK d $600,000
dUsetaxrateinStateH
.06
Precreditusetax
e $36,000
Salest axpaidtoStateK e d d e (18,000)
UsetaxowedtoStateH d $18,000
b. ValueofpropertypurchasedinStateL d $750,000
dUsetaxrateinStateH
.06
Copyright©2020McGraw-HillEducation. Allrightsreserved. e d
Noreproductionordistributionwithoutt hepriorwrittenconsent ofMcGraw-Hill
e e d e e d
Education. d
, Precredit usetax
e e $45,000
Salestaxpaidt oStateL
d e d (48,750)
Usetax owedtoStateH
e -0-
Copyright©2020McGraw-HillEducation. Allrightsreserved.
e d
Noreproductionordistributionwithoutt hepriorwrittenconsent ofMcGraw-Hill
e e d e e d
dEducation.
