South-Western Federal Taxation 2022 Essentials of Taxation Individuals and Business Entities 25th ed
INTRODUCTION TO TAXATION
SOLUTIONS TO PROBLEM MATERIALS
PROBLEMS
1. (LO 1) Various answers are possible, including using the Key Terms at the end of each chapter,
referring to the Glossary (Appendix C), looking up the footnote resources to the Internal Revenue
Code in Appendix D, using chapter features (e.g., Global Tax Issues, Ethics & Equity, Tax Planning,
and Digging Deeper), examining the tax forms used in the chapters, and completing additional end-
of-chapter assignments. All of these resources will help students engage more deeply with the
materials and help their understanding.
2. (LO 3, 5, 6) Some tax and nontax considerations James should investigate include the following:
• State and local income taxes.
• State and local sales taxes.
• State and local property taxes.
• Employee implications of the move (Will James lose current employees? Is the labor market
better in the new location? Is cost of living lower or higher in new location?).
• Logistics/transportation of products to customers (specifically document lower costs).
• State infrastructure (better in new location?).
3. (LO 1, 2, 3) A tax is regressive if it represents a larger percentage of the income of a low-income
taxpayer relative to the income of a high-income taxpayer. Examples of regressive taxes include sales
and excise taxes. A tax is progressive if it represents a larger percentage of the income of a high-
income taxpayer relative to the income of a low-income taxpayer. The Federal income tax is an
example of a progressive tax.
4. (LO 3)
a. The parsonage probably was not listed on the property tax rolls because it was owned by a tax-
exempt church. Apparently, the taxing authorities are not aware that ownership has changed.
b. Ethan should notify the authorities of his purchase. This will force him to pay back taxes but
may eliminate future interest and penalties.
5. (LO 1, 6) (See Digging Deeper 1.) As to Adam Smith’s canon on economy, the Federal income tax
yields a mixed result. From the standpoint of the IRS, economy exists as collection costs are nominal
(when compared with revenue generated). The government's cost of collecting Federal taxes amounts
to less than one-half of 1 percent of the revenue collected. Economy is not present, however, if one
looks to the compliance effort and costs expended by taxpayers. According to recent estimates, about
56% of individual taxpayers who file a return pay a preparer, and one-third purchase tax software.
1-2 2022 Essentials of Taxation/Solutions Manual
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6. (LO 3) Jang probably will be required to pay the Washington use tax if, and when, he applies for
Washington license plates. In this case, the use tax probably is the same amount as the Washington
sales tax. See the discussion in connection with Example 4 in the textbook.
7. (LO 3) Although the Baker Motors bid is the lowest, from a long-term financial standpoint, it is the
best. The proposed use of the property by the state and the church probably will make it exempt from
the school district’s ad valorem tax. This would hardly be the case with a car dealership. In fact,
commercial properties (e.g., car dealerships) often are subject to higher tax rates.
8. (LO 3, 4) A possible explanation is that Sophia made capital improvements (e.g., added a swimming
pool) to her residence and her parents became retirees (e.g., reached age 65).
9. (LO 5, 6) SWFT, LLP
5191 Natorp Boulevard
Mason, OH 45040
February 25, 2022
Cynthia Clay
1206 Seventh Avenue
Fort Worth, TX 76101
Dear Cynthia:
I am writing this letter to help you decide on what form of entity to choose for your new burrito
delivery business. In our phone conversation, you indicated that you expect to have losses for the first
two years in this business and then make substantial profits in subsequent years. You and Marco also
indicated that you are concerned about potential personal liability.
While I can’t make a conclusive recommendation based on the information you have given me, I can
provide you with some general guidelines that should simplify your decision. First, given your
concern about personal liability, a partnership does not appear to be a desirable option (you would
both be personally liable for any injuries to customers). Similarly, given your expectation of losses in
the first two years, it does not appear that a C corporation would be a desirable choice, at least
initially. This is because any losses in the corporation could only be used to offset future corporate