INTRODUCTION TO TAXATION
SOLUTIONS TO PROBLEM MATERIALS
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Some tax considerations James should investigate include the following:
● State and local income taxes.
● State and local sales taxes.
● State and local property taxes.
Many such taxes could affect any cost-of-living differential.
2. A tax is proportional if the rate of tax remains constant for any given income level. The tax is progressive if a higher rate of tax applies as the tax base increases.
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 will eliminate future interest and penalties.
4. As to Adam Smith’s canon on economy, the Federal income tax yields a mixed result. From the standpoint of the IRS, economy is there as collection costs are nominal (when compared with revenue generated). Economy is not present, however, if one looks to the compliance effort and costs expended by taxpayers.
5. Jim 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.
6. An excise tax is limited to a particular transaction (e.g., sale of gasoline), while a general sales tax covers a multitude of transactions (e.g., sale of all non-food goods).
a. The following states do not impose a general sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.
b. There is no Federal general sales tax.
7. 16 (donees) × $14,000 (annual exclusion) × 10 years = $2,240,000.
8. Because the property is no longer being used for religious purposes, the downtown location should no longer be exempt from ad valorem taxes. Also, the church would have an income tax problem (unrelated business income) with the lease payment it receives.
9. In all probability, the residence was not on the property tax rolls when it was owned by a tax-exempt organization (i.e., St. Matthew’s Catholic Church)—see p. 1-11 in the text. Also clear is the fact that the taxing authority is not aware that the residence is no longer owned by a tax-exempt organization.
Since it is only a question of time before the omission is noticed by the taxing authority, it would be advisable for the Toths to get the matter cleared up. In many cases, further delay can lead to additional interest and penalties.
10. 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.
11. Eileen may have...