Chapter 1

An Introduction to Tax

SOLUTIONS MANUAL

Discussion Questions

(1) [LO 1] Jessica’s friend Zachary once stated that he couldn’t understand why

someone would take a tax course. Why is this a rather naïve view?

Taxes are a part of everyday life and have a financial effect on many of the major

personal decisions that individuals face (e.g., investment decisions, evaluating

alternative job offers, saving for education expenses, gift or estate planning, etc.).

(2) [LO 1] What are some aspects of business that require knowledge of taxation?

What are some aspects of personal finance that require knowledge of taxation?

Taxes play an important role in fundamental business decisions such as the

following:

 What organizational form should a business use?

 Where should the business locate?

 How should business acquisitions be structured?

 How should the business compensate employees?

 What is the appropriate mix of debt and equity for the business?

 Should the business rent or own its equipment and property?

 How should the business distribute profits to its owners?

One must consider all transaction costs (including taxes) to evaluate the merits of

a transaction.

Common personal financial decisions that taxes influence include: choosing

investments, retirement planning, choosing to rent or buy a home, evaluating

alternative job offers, saving for education expenses, and doing gift or estate

planning.

(3) [LO 1] Describe some ways in which taxes affect the political process in the

United States.