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Exam 3: Tax Planning Strategies and Related Limitations

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Question 1

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A taxpayer instructing her son to collect rent checks for the taxpayer's property and to report this as taxable income on the son's tax return violates which doctrine?

A) constructive receipt doctrine
B) implicit tax doctrine
C) assignment of income doctrine
D) step-transaction doctrine
E) None of these

F) C) and D)
G) B) and D)

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C

Question 2

Multiple Choice

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A taxpayer earning income in "cash" and not reporting it as taxable income is an example of:

A) tax avoidance
B) tax evasion
C) conversion
D) income shifting
E) None of these

F) All of the above
G) A) and B)

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Question 3

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Paying dividends to shareholders is one effective way of shifting income from a corporation to its shareholders.

The conversion strategy capitalizes on the fact that tax rates vary across different activities.

Assume that Jose is indifferent between investing in a corporate bond that pays 10% interest and a stock with no growth potential that pays an 8% dividend yield. Assume that the tax rate on dividends is 15%. What is Jose's marginal tax rate?

There are two basic timing-related tax rate strategies. What are they? What is the intent of each strategy? In which situations do the tax rate and timing strategies provide conflicting recommendations? What information do you need to determine the appropriate action?

Which of the following is needed to implement the income shifting strategy?

Boeing is considering opening a plant in two neighboring states. One state has a corporate tax rate of 15%. If operated in this state, the plant is expected to generate $1,200,000 pre-tax profit. The other state has a corporate tax rate of 5%. If operated in this state, the plant is expected to generate $1,085,000 of pre-tax profit. Which state should Boeing choose? Why do you think the plant in the state with a lower tax rate would produce a lower pre-tax income?

Explain why $1 today is not equal to $1 in the future. Why is understanding this concept particularly important for tax planning? What tax strategy exploits this concept?

Bobby and Whitney are husband and wife and Whitney operates a sole proprietorship. They expect their joint taxable income next year to be $200,000, of which $125,000 is attributed to the sole proprietorship. Whitney is contemplating incorporating the sole proprietorship. Using the 2014 married filing joint tax brackets and the corporate tax brackets, how much current tax could this strategy save Bobby and Whitney? How much income should be retained in the corporation?

If Joel earns a 10% after-tax rate of return, $10,000 received in two years is worth how much today (rounded) ?

The constructive receipt doctrine is more of an issue for cash basis taxpayers.

Assume that Lucas' marginal tax rate is 30% and his tax rate on dividends is 15%. If a dividend-paying stock (with no growth potential) pays an 8% dividend yield, what interest rate would a municipal bond have to offer for Lucas to be indifferent between the two investments?

Based only on the information provided for each scenario, determine whether Eddy or Scott will benefit more from using the timing strategy and why there will be a benefit to that person. a. Eddy has a 40% tax rate. Scott has a 30% tax rate. b. Eddy and Scott each have a 40% tax rate. Eddy has $10,000 of income that could be deferred; Scott has $20,000 of income that could be shifted. c. Eddy and Scott each have a 40% tax rate and $20,000 of income that could be deferred. Eddy's after-tax rate of return is 8%. Scott's after-tax rate of return is 10%. d. Eddy and Scott each have a 40% tax rate, $20,000 of income that could be deferred, and an after-tax rate of return of 10%. Eddy can defer income up to 3 years. Scott can defer income up to 2 years.

Joe Harry, a cash basis taxpayer, owes $20,000 in tax deductible accounting fees for his business. Assume that it is December 28 and that Joe Harry can avoid any finance charges if he pays the accounting fees by January 10th. Joe Harry's tax rate this year is 30%. His tax rate next year will be 33%. His after-tax rate of return is 8%. When should Joe Harry pay the $20,000 fees and why?

If Lucy earns a 6% after-tax rate of return, $8,000 received in four years is worth how much today?

Assume that Javier is indifferent between investing in a city of El Paso bond that pays 5% interest and a corporate bond that pays 6.25% interest. What is Javier's marginal tax rate?

Which is not a basic tax planning strategy?

If Nicolai earns an 8% after-tax rate of return, $20,000 today would be worth how much to Nicolai in 5 years?

If Rudy has a 25% tax rate and a 6% after-tax rate of return, a $30,000 tax deduction in four years will save how much tax in today's dollars (rounded) ?