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Exam 3: Tax Planning Strategies and Related Limitations

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Question 21

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Virtually every transaction involves the taxpayer and two other parties that have an interest in the tax ramifications of the transaction.

A) True
B) False

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Question 22

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The concept of present value is an important part of the timing strategy.

A) True
B) False

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Question 23

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Tax avoidance is a legal activity that forms the basis of the basic tax planning strategies.

Lucky owns a maid service that cleans several local businesses nightly. Lucky, a high tax rate taxpayer, would like to shift some income to his son Rocco. Lucky tells all of his customers (who are always timely in their payments)to pay Rocco, and then Rocco will report 50 percent of the income as a collection fee. Lucky will report the remaining 50 percent. Will this shift the income from Lucky to Rocco? Why or why not? What doctrines influence your answer? Any suggestions for Lucky?

Assume that John's marginal tax rate is 37 percent. If a city of Austin bond pays 6 percent interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds?

Which of the following tax planning strategies is based on the present value of money?

Sal, a calendar-year taxpayer, uses the cash-basis method of accounting for his sole proprietorship. In late December, he performed $40,000 of consulting services for a client. Sal typically requires his clients to pay his bills immediately upon receipt. Assume that Sal's marginal tax rate is 32 percent this year and 37 percent next year and that he can earn an after-tax rate of return of 12 percent on his investments. Should Sal send his client the bill in December or January? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)

The assignment of income doctrine is a natural limitation to the timing strategy.

The time value of money suggests that $1 one year from now is worth less than $1 today.

Troy is not a very astute investor. He has a knack for investing in losing stocks. In his latest investment move, he has realized a loss of about $40,000 (original basis of $50,000; current fair market value of $10,000)in High Tech, Incorporated The good news is that unlike prior years, he actually has $45,000 of gains that he can use to offset the loss. Troy is considering either selling the High Tech, Incorporated stock to his sister, Louise, or on the stock market. Which should he choose and why? Please explain why the IRS may treat the two transactions differently.

A common income-shifting strategy is to:

The income-shifting strategy requires taxpayers with varying tax rates.

If Nicolai earns an 12 percent after-tax rate of return, $15,000 today would be worth how much to Nicolai in five years? Use future value of $1. (Round discount factor(s) to four decimal places.)

Which of the following does not limit the benefits of deferring income?

Which of the following does not limit the income-shifting strategy?

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

The income-shifting and timing strategies are examples of:

If Lucy earns a 7 percent after-tax rate of return, $27,000 received in four years is worth how much today? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.)

Assume that Larry's marginal tax rate is 24 percent. If corporate bonds pay 7.8 percent interest, what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

Assume that Lucas's marginal tax rate is 12 percent and his tax rate on dividends is 6 percent. If a dividend-paying stock (with no growth potential) pays an 8 percent dividend yield, what interest rate would a municipal bond have to offer for Lucas to be indifferent between the two investments from a cash-flow perspective?