Taxation For Decision Makers, 2017th Edition Solution Manual

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Solutions to Chapter 1 Problem AssignmentsCheck Your Understanding1. [LO 1.1]What is a tax?What is a tax?How does a tax differ from a fine?Solution:A tax is a payment thatisnot voluntary butisrequired to be paid to a governmentalunit to support its operations; it is not based on the value of goods or services theperson or business receives, however. A fine is levied as a result of an unlawful act.2. [LO 1.1]ConstitutionalAuthorityWhat Constitutional Amendment allowed implementation of an income tax? In what year wasit ratified?Solution:The federal income tax system as we know it today did not begin until 1913 whenthe 16th Amendment to the U.S. Constitution wasratified. The 16th Amendmentgave Congress the power to lay and collect taxes “on income, from whatever sourcederived,” without the previous requirement that all direct taxes be imposed basedon population.3. [LO 1.1]Current Tax CodeWhich version of the tax code is applicable today?Solution:The Tax Reform Act of 1986 was so extensive, the Code was renamed theInternalRevenue Code of 1986. Any current changes to the tax laws are now amendmentsto theInternal Revenue Code of 1986.4. [LO 1.1]Tax ExpendituresDefine tax expenditure?Solution:Tax expenditures can take the form of special exclusions, deductions, credits orpreferential rates for specific activities. These tax expenditures result in a reductionin the revenue that would becollected under a more comprehensive income tax.5. [LO 1.1]SALTWhat is a SALT practice?Solution:The practice ofstateandlocaltaxation is commonly referred to as a SALT practice.6. [LO 1.1]Franchise TaxHow does a franchise tax differ from anincome tax?Solution:A franchise tax is an excise tax based on the right to do business or own property ina state. It is, however, usually determined based on corporate income so would, ineffect, simply be another name for the income tax.7. [LO 1.1]State Income AllocationWhat three factors determine the percentage of corporate income allocated to a particularstate?Solution:The three-factor allocation formula uses a percentage of corporate sales, payroll

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