SOLUTION MANUAL
Principles of Taxation for Business and Investment Planning 2020
23rd Edition by Sally Jones and Shelley Rhoades Catanach
All chapters 1-18
,TABLE OF CONTENT y y
PART ONE Exploring the Tax Environment
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Ch. 1 Taxes and Taxing Jurisdictions
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Ch. 2 Policy Standards for a Good Tax
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PART TWO Fundamentals of Tax Planning
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Ch. 3 Taxes as Transaction Costs
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Ch. 4 Maxims of Income Tax Planning
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Ch. 5 Tax Research
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PART THREE The Measurement of Taxable Income
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Ch. 6 Taxable Income from Business Operations
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Ch. 7 Property Acquisitions and Cost Recovery Deductions
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Appendix 7–A Midquarter Convention Tables
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Ch. 8 Property Dispositions
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Ch. 9 Nontaxable Exchanges
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PART FOUR The Taxation of Business Income
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Ch. 10 Sole Proprietorships, Partnerships, LLCs, and S Corporations
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Ch. 11 The Corporate Taxpayer
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Appendix 11–A Schedule M-3 for Reconciling Book and Taxable Income
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Ch. 12 The Choice of Business Entity
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Ch. 13 Jurisdictional Issues in Business Taxation
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PART FIVE The Individual Taxpayer
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Ch. 14 The Individual Tax Formula
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Ch. 15 Compensation and Retirement Planning
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Ch. 16 Investment and Personal Financial Planning
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Appendix 16–A Comprehensive Schedule D Problem
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Ch. 17 Tax Consequences of Personal Activities
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Appendix 17– y
A Social Security Worksheet (Adapted from IRS Publication 915)
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PART SIX The Tax Compliance Process
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Ch. 18 The Tax Compliance Process
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,Chaptery1yTaxesyandyTaxingyJurisdictions
QuestionsyandyProblemsyforyDiscussion
1. Taxy paymentsydifferyfromygovernmentyfinesyandypenaltiesybecauseytheyyaren‘tyintendedytoydeter
y orypunishyunacceptableybehavior.yTaxypaymentsydifferyfromyfeesyoryuserychargesybecauseythey
y don‘tyentitleytheypayerytoyayspecificygovernmentygoodyoryservice,y suchyasyaypostageystampyoryay
driver‘sylicense.yTaxy paymentsyalsoydifferyfromyfeesyoryuserychargesybecauseytheyyarey compulso
ry.
2. Thisypaymentyhasycharacteristicsyofy aytax,yaypenalty,yandyayuseryfee.yTheycompulsoryypaymentyisy
notyspecificallyypunitiveybutydoesyapplyyselectivelyytoythoseycompaniesymostylikelyyresponsibleyfory
theypollutedyconditionyofyGreenyRiver.yHowever,ytheseysameycompaniesymayybeytheyentitiesythaty b
enefitymostyfromytheyenvironmentalyclean-up.
3. Thisypaymentymoreycloselyyresemblesyayfeeyforyaygovernmentyserviceythanyaytransaction-
basedy taxybecauseytheytransactionyoccursybetweenyayprivateypartyyandytheyjurisdictionyitself,yrath
erythany betweenyprivateypartiesyengagingyinyaymarketytransaction.yTheypaymentyalsoyentitlesytheyp
ayerytoy ayspecificybenefity(theyrightytoymarryyunderylaw).
4. Toytheyextentythatytheydeclineyinyexteriorymaintenanceyreducesytheyvalueyofy Mr.yPowell‘sy apartmen
tycomplex,yheybearsytheyincidenceyofytheyincreasedypropertyytax.yToytheyextentythatythey declineyred
ucesytheyvalueyofyadjoiningypropertiesyorymakesytheyneighborhoodylessyattractive,ythey ownersyofy t
heyadjoiningypropertiesyandytheyneighborhoodyresidentsyshareytheyincidenceyofytheytaxy increase.
5. Peopleywhoydon‘tydirectlyyuseypublicyschoolsy(suchyasyMr.yandyMrs.yAhernyorypeopleywhoydon‘ty ha
veychildren)yindirectlyybenefityfromy aypublicyeducationysystemyforytheygeneralypopulation.y Arguably
,ypublicyeducationycontributesytoyayskilledyworkforceyandyimprovesytheyculturalyandysocialy environ
mentyinywhichyMr.yandyMrs.yAhernylive.yBasedyonythisyargument,yMr.yandyMrs.yAherny shouldynotyb
eyexemptyfromytheylocalypropertyytax.
6. Theyconsumersywhoypayytheysameypriceyforyaysmallerybaryofy soapyofylesseryqualityybearythey i
ncidenceyofytheynewygrossyreceiptsytax.
7. Realypropertyycan‘tybeyhiddenyorymoved,yandyitsyownershipy(legalytitle)yisyaymatteryofypublicy r
ecord.yInycontrast,ypersonalypropertyyisymobileyandymayybeyeasilyyconcealed.yMoreover,y juri
sdictionsymayynotyhaveyanyeffectiveymeansytoydiscoveryorytraceyownershipyofypersonaly prop
erty.
8. Arguably,yprivateygolfycoursesybeautifyytheylocalityyandyareyenvironmentallyymoreydesirableythan
y otherycommercialy activities.yTheyyalsoymayyrequireymoreyacreageythanyotherybusinessesyand,y t
herefore,ywouldybeyatyaycompetitiveydisadvantageywithoutyaypreferentialyrealypropertyytaxy rate.
9. Manyyjurisdictionsythatylevyypropertyytaxesyprovideyanyexemptionyforypublicyinstitutions,ysuchyasy
stateyuniversitiesyoryprivateycolleges.yIfyUniversityyKyisyentitledytoysuchyanyexemption,yeveryy com
mercialybuildingyoryresidenceyacquiredybyytheyUniversityyreducesytheylocalyjurisdiction‘sy property
ytaxy base.
, 10. Exciseytaxesyareyimposedyonyaymuchynarroweryrangeyofyconsumerygoodsyandyservicesythany
salesytaxes.yConsequently,ypeopleycanymoreyreadilyyavoidypurchasingytheyspecificygoodyory s
erviceysubjectytoyexciseytax.
11. Theytaxyincreaseymayyhaveyreducedytheyaggregateydemandyforyconsumerygoodsyand,y consequen
tly,ymunicipalyresidentsyareybuyingyfewerygoods.yAysecondypossibilityyisythatymunicipaly residentsyar
eytravelingytoyotheryjurisdictionsywithylowerytaxyratesyorymakingymoreypurchasesy throughymailyorde
rycatalogsyoryon-line.
12. Fromy aypoliticaly perspective,yliquoryandycigarettesysalesymakeyanyexcellentytaxybaseybecausey con
sumptionyofytheytwoyproductsyisypurelyydiscretionary,yandyanyydeclineyinyconsumptionyy y becauseyof
ytheytaxyisysociallyydesirable.yFromy anyeconomicyperspective,ytheseysalesyareyaygoody taxybaseybec
auseytheydemandyforyliquoryandycigarettesyisyrelativelyypriceyinelastic.yInyotheryy y words,ypeopleywh
oydrinkyandysmokeyonyayregularybasisybuyytheseyproductsyregardlessyofy ayheavyy exciseytax.
13. Theyfederalyincomeyhasytheybroaderybase.yTheyfederalypayrollytaxyisyimposedyonywages,ysalaries,y
andyotheryformsyofycompensationyearnedybyyemployees.y Theyfederalyincomeytaxyisyimposedyonyy al
lytypesyofy compensationyasywellyasynetybusinessyprofit,yinvestmentyincome,yandyanyyothery incomey
itemyfromywhateverysourceyderived.
14. Aypropertyytaxyisyayperiodicy(usuallyyannual)ytaxyleviedyonytheyownershipyofy propertyyandybasedy on
ytheyvalueyofytheypropertyyonyayparticularyassessmenty date.yAytransfery taxyisyaytransaction-
y basedytaxyleviedyonytheytransferyofypropertyyfromyoneypartyytoyanother.y Aytransferytaxyisybasedyon
y theyvalueyofy theypropertyyatydateyofy transfer.
15. Ifytheyfederalygovernmentycouldy―piggyyback‖yaynationalysalesytaxyonyexistingystateysalesytaxy coll
ectionysystems,ytheyfederalygovernmentycouldyavoidycreatingyaynewyfederalyagencyyfory collectin
gytheytax.yInycontrast,ytheyfederalygovernmentywouldyhaveytoycreateyaynewycollectiony systemyfory
aynationalyVAT.yHowever,yaynationaly VATywouldybeylessylikelyytoycauseyjurisdictionaly conflictybet
weenytheyfederalygovernmentyandytheystatesybecauseystatesydon‘tydependyonyVATsy asyaysource
yofy revenue.
16. TheyInternaly RevenueyCodeyisyfederalystatutoryylaw,yenactedybyyCongressyandysignedybyythey Pres
ident.yTechnically,yTreasuryyregulationsyonlyyinterpretyandyexplainytheystatuteyandyaren‘ty lawsyinyth
eiryownyright.yThus,yregulationsyareylessyauthoritativeythanytheyCodeyitself.yHowever,y becauseyCon
gressyauthorizedytheyTreasuryytoywriteyregulations,ytheyyareytheygovernment‘sy officialyinterpretatio
nyofy statutoryylaw.yPractically,ytheyregulationsycarryyconsiderableyauthoritativey weight.
ApplicationyProblems
1. a.yyy Theystatementyofyfactsyidentifiesythreeytaxpayers:y Mr.yJoshyKenney,yJKyServices,yandyJKy
Realty.
b. TheygovernmentyofytheylocalityyinywhichyMr.yKenneyyresides,ytheystateygovernmentyofy Vermo
nt,yandytheyU.S.ygovernmentyhaveyjurisdictionytoytaxyMr.yKenney.yTheylocaly governmentsyofyt
heyfourycountiesyinywhichyJKyServicesyconductsybusiness,ytheystatey governmentyofyVermont
,yandytheyU.S.ygovernmentyhaveyjurisdictionytoytaxyJKyServices.yThey cityyofyBoston,ytheystate
ygovernmentyofy Massachusetts,y andytheyU.S.y governmentyhavey jurisdictionytoytaxy JKyRealty.
2. a.yyy TheyUnitedyStatesyhasyjurisdictionytoytaxyMrs.yMayybecauseysheyisyaypermanentyresident.
b. TheyUnitedyStatesyhasyjurisdictionytoytaxyMrs.yMayyonlyyonytheyU.S.ysourceyrentalyincome
y generatedybyytheyManhattanyrealy estate.
