Bonus Chapter A – Working within the Legal Environment
A-31
wake of the Enron and WorldCom scandals.
2. The PUBLIC COMPANY ACCOUNTING RE-
FORM AND INVESTOR PROTECTION ACT
(Sarbanes-Oxley Act) requires CEOs to verify
the accuracy of their firms’ financial statements
to the SEC.
3. The market meltdown raised consumer anger at
the lack of oversight of the securities market.
4. The DODD-FRANK ACT created the Consum-
er Financial Protection Bureau that provides
government oversight involving consumers.
B. Figure A.4 lists major consumer protection laws.
learning objective 7
Explain the role of tax laws in generating income for the government and
as a method of discouraging or encouraging certain behaviors among tax-
payers.
VIII. TAX LAWS
A. TAXES are how government (federal, state, and lo-
cal) raises money.
B. Governments use taxes to:
1. FUND government operations
2. DISCOURAGE citizens from doing what it con-
siders harmful (for example, sin taxes on ciga-
rettes and alcohol)
3. ENCOURAGE businesses to hire new employ-
ees or purchase new equipment by offering a
Bonus Chapter A – Working within the Legal Environment
A-32
PPT A-30
Consumer Protections
CONSUMER PROTECTIONS
A-30
LO A-6
• Consumerism — A social movement that seeks to
increase and strengthen the rights and powers of
buyers in relations to sellers.
• The collapse of the real estate market and crisis
in the banking industry led to the Dodd-Frank
Wall Street Reform and Consumer Protection Act.
• Dodd-Frank created the Consumer Financial
Protection Bureau.
PPT A-31
Number of Identity Theft Com-
plaints
Source:FederalTradeCommission,www. c.gov,accessedJuly2011.
NUMBER of IDENTITY THEFT
COMPLAINTS
A-31
LO A-6
TEXT FIGURE A.4
Consumer Protection Laws
This text figure lists several major consumer protection laws
and their purpose.
PPT A-32
Taxes
TAXES
A-32
LO A-7
• Taxes — The way federal, state, and local
governments raise money.
• Some forms of taxes:
– Income taxes
– Property taxes
– Sales taxes
– Excise taxes
lecture enhancer A–7
TAX DODGING CORPORATIONS
COST THE U.S. BILLIONS
Although patents, copyrights, and trademarks are similar legal
concepts, each has a very specific definition. (See the com-
plete lecture enhancer on page A.64 of this manual.)
Bonus Chapter A – Working within the Legal Environment
A-33
TAX CREDIT
C. Taxes are levied from a variety of SOURCES.
1. INCOME, SALES, and PROPERTY are the ma-
jor bases of tax revenue.
2. States and local communities often make exten-
sive use of SALES TAXES.
3. Businesses take the tax policies of states and
cities into consideration when deciding where to
locate operations.
D. A key tax issue in the next few years involves IN-
TERNET TAXATION, especially e-commerce.
1. States claim to lose billions in sales tax as a re-
sult of e-commerce.
2. The European Union already levies certain In-
ternet taxes.
learning objective 8
Distinguish among the various types of bankruptcy as outlined by the
Bankruptcy Code.
IX. BANKRUPTCY LAWS
A. BANKRUPTCY is the legal process by which a per-
son, business, or government entity, unable to meet
financial obligations, is relieved of those obligations
by a court that divides any assets among creditors,
allowing creditors to get at least part of their money
and freeing the debtor to begin anew.
1. The court divides any assets among creditors.
2. The Constitution gives Congress the power to
establish bankruptcy laws.
Bonus Chapter A – Working within the Legal Environment
A-34
PPT A-33
Sin Taxes
Source:TobaccoFreeKids,www.tobaccofreekids.org,accessedNovember2014.
SIN TAXES
State Tax Rates per Pack of Cigarettes
A-33
State(s) Rate per Pack
New York $4.35
Massachusetts $3.51
Rhode Island $3.50
Connecticut $3.40
Hawaii $3.20
Washington $3.025
Minnesota $2.83
LO A-7
PPT A-34
Do the Rich Pay Taxes?
Source:IRS,Sta s csofIncome,www.irs.gov,accessedNovember2014.
DO the RICH PAY TAXES?
A-34
Taxpayers % of Total Taxes
Top 1% 40% of total taxes
Top 5% 60% of total taxes
Top 25% 86% of total taxes
Top 50% 97% of total taxes
Bottom 50% 3% of total taxes
LO A-7
TEXT FIGURE A.5
Types of Taxes
This text figure highlights the primary types of taxes levied on
individuals and businesses.
lecture enhancer A-8
GOOGLE’S TAX TACTICS
Tax havens are used by multinationals, including Google. (See
the complete lecture enhancer on page A.65 of this manual.)
Bonus Chapter A – Working within the Legal Environment
A-35
B. AMENDMENTS TO THE BANKRUPTCY LAW
1. The BANKRUPTCY AMENDMENTS OF 1984
allow a person who is bankrupt to keep part of
the equity in a house.
2. The BANKRUPTCY REFORM ACT OF 1994
creates reforms that speed up and simplify the
process.
3. The BANKRUPTCY REFORM ACT OF 2005
made it harder for individuals to eliminate most
debts from a bankruptcy.
C. In 2013 1.03 MILLION AMERICANS filed for bank-
ruptcy.
1. The number of bankruptcies increased in the
1980s and 1990s.
2. The 2005 BANKRUPTCY LEGISLATION
makes it more difficult for people to escape debt
from credit cards, medical bills, student loans, or
other unsecured loans.
3. Filings dropped to 600,000 in 2006.
4. Over 90% of filings each year are by individuals.
D. Bankruptcy can be either VOLUNTARY or INVOL-
UNTARY.
1. VOLUNTARY BANKRUPTCY involves legal
procedures initiated by a debtor.
2. INVOLUNTARY BANKRUPTCY involves bank-
ruptcy procedures filed by a debtor’s creditors.
E. Bankruptcy procedures are filed under one of the
Bonus Chapter A – Working within the Legal Environment
A-36
PPT A-34
Bankruptcy Laws
BANKRUPTCY LAWS
A-35
LO A-8
• Bankruptcy — The legal process by which a person,
business, or government entity, unable to meet
financial obligations, is relieved of those debts by a
court.
• Options of declaring bankruptcy:
– Chapter 7: Straight bankruptcy
– Chapter 11: Reorganization
– Chapter 13: Repayment plan
Bonus Chapter A – Working within the Legal Environment
A-37
following SECTIONS OF THE BANKRUPTCY
CODE:
1. CHAPTER 7: “Straight bankruptcy” or liquidation
(used by businesses and individuals)
2. CHAPTER 11: Reorganization (used by busi-
nesses and some individuals)
3. CHAPTER 13: Repayment (used by individuals)
F. CHAPTER 7 calls for “STRAIGHT BANKRUPT-
CY,” which requires the sale of nonexempt assets
of debtors.
1. Up to $21,625 of equity in a home and $3,225
equity in a car are protected.
2. Cash from the sale is divided among creditors
3. First, creditors with SECURED CLAIMS are
paid, and then the unsecured claims are paid.
4. Chapter 7 is the most popular form of bankrupt-
cy.
5. Text Figure A.6 lists the order that UNSE-
CURED CLAIMS are paid.
G. CHAPTER 11
1. Under Chapter 11 a company CONTINUES TO
OPERATE, but has court protection against
creditors’ lawsuits while it tries to work out a
debt repayment plan.
2. Less than 33% of Chapter 11 companies sur-
vive.
3. The Bankruptcy Reform Act of 1994 extends a
Bonus Chapter A – Working within the Legal Environment
A-38
PPT A-36
Chapter 7 Bankruptcy
CHAPTER 7 BANKRUPTCY
A-36
LO A-8
• Creditors with secured claims receive their
collateral or repossess the asset.
• Unsecured claims are paid in this order:
1) Costs of the bankruptcy case
2) Any business costs after filing
3) Wages, salaries, commissions
4) Contributions to employee benefits
5) Refunds to consumers for products not delivered
6) Federal and state taxes
PPT A-37
How Assets Are Divided in
Bankruptcy
TEXT FIGURE A.6
How Assets Are Divided in
Bankruptcy
How ASSETS are DIVIDED in
BANKRUPTCY
A-37
LO A-8
Bonus Chapter A – Working within the Legal Environment
A-39
“fast track” procedure for small businesses filing
under Chapter 11.
4. Individuals have the right to file bankruptcy un-
der Chapter 11, but it is uncommon.
H. CHAPTER 13 permits individuals, including
small-business owners, to PAY BACK CREDITORS
OVER A THREE-TO-FIVE-YEAR PERIOD.
1. CHAPTER 13 proceedings are less complicated
than Chapter 7 proceedings.
2. The debtor files a proposed plan for paying off
debts to the court.
learning objective 9
Explain the role of deregulation as a tool to encourage competition.
X. DEREGULATION VERSUS REGULATION
A. DEREGULATION is government withdrawal of cer-
tain laws and regulations that seem to hinder com-
petition.
B. Deregulation has had a huge impact on the airline
and telecommunication industries.
1. When restrictions on routes were lifted under the
Deregulation Act of 1978, airlines began com-
peting for routes and lowering prices.
2. Today, some feel more government intervention
is needed since passenger services have de-
creased and delays or cancellations have in-
creased.
3. Similar deregulation in telecommunication oc-
curred after the passage of the TELECOM-
Bonus Chapter A – Working within the Legal Environment
A-40
PPT A-38
Going, Going, Gone
GOING, GOING, GONE
Big Bankruptcies of 2008-2014
A-38
LO A-8
• Circuit City
• KB Toys
• Linens N Things
• Borders
• City of Detroit
PPT A-39
Deregulating Commerce
• Deregulation — The government withdraws certain
laws and regulations that seem to hinder competition.
DEREGULATING COMMERCE
A-39
LO A-9
• Deregulation efforts
were active in:
– The airline industry
– Telecommunication
– Some public utilities
PPT A-40
Hamburger Regulations
TEXT FIGURE A.7
Hamburger Regulations
HAMBURGER REGULATIONS
A-40
LO A-9
Bonus Chapter A – Working within the Legal Environment
A-41
MUNICATIONS ACT OF 1996.
4. Deregulation efforts have also been attempted in
the electric power industry.
a. California was the first state to deregulate
power and experienced significant problems.
b. Time will tell whether utility deregulation will
survive and prosper.
5. New regulations in the banking and investments
industries changed the nature of financial mar-
kets and created huge problems.
a. The Federal Reserve was reluctant to
toughen mortgage regulations, contributing
to the collapse of the real estate market.
b. The failure of huge financial institutions also
angered consumers.
6. The electric power industry has also been the
target of deregulation, with disastrous results
in California; other states dropped deregula-
tion plans.
7. In 2010, the Patient Protection and Affordable
Care Act introduced a comprehensive system of
mandated health insurance for 32 million Ameri-
cans and increased government regulation of
the insurance industry.
C. Some regulation of business is necessary to assure
fair and honest dealings with the public.
1. The scandals of the early 2000s and the finan-
cial market collapse led to a further demand for
Bonus Chapter A – Working within the Legal Environment
A-42
Bonus Chapter A – Working within the Legal Environment
A-43
better government regulation and oversight.
2. With global competition increasing, businesses
and government need to continue to work to-
gether to create a competitive environment that
is fair and open.
XI. SUMMARY
Bonus Chapter A – Working within the Legal Environment
A-44
test
prep
PPT A-41
Test Prep
Bonus Chapter A – Working within the Legal Environment
A-45
PowerPoint slide notes
PPT A-1
Chapter Title
Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Working
within the
Legal
Environment
BONUS CHAPTER A
PPT A-2
Learning Objectives
LEARNING OBJECTIVES
A-2
1. Define business law, distinguish between statutory and
common law, and explain the role of administrative
agencies.
2. Define tort law and explain the role of product liability in
tort law.
3. Identify the purposes and conditions of patents,
copyrights, and trademarks.
4. Describe warranties and negotiable instruments as
covered in the Uniform Commercial Code.
5. List and describe the conditions necessary to make a
legally enforceable contract, and describe the possible
consequences if such a contract is violated.
PPT A-3
Learning Objectives
LEARNING OBJECTIVES
A-3
6. Summarize several laws that regulate competition
and protect consumers in the United States.
7. Explain the role of tax laws in generating income for
the government and as a method of discouraging or
encouraging certain behaviors among taxpayers.
8. Distinguish among the various types of bankruptcy
as outlined by the Bankruptcy Code.
9. Explain the role of deregulation as a tool to
encourage competition.