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Exam 3: Tax Planning Strategies and Related Limitations

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Question 51

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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) A) and D)
G) C) and E)

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Question 52

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If Julius has a 30% tax rate and a 10% after-tax rate of return, a $40,000 tax deduction in two years will save how much tax in today's dollars? (round present and future value amounts to 3 places)

A) $40,000.
B) $9,912.
C) $33,040.
D) $12,000.
E) None of these.

F) None of the above
G) B) and E)

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Question 53

Multiple Choice

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

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?

Assume that Lavonia's marginal tax rate is 20%. If a city of Tampa bond pays 5% interest, what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

When considering cash outflows, higher present values are preferred.

If tax rates are decreasing:

The constructive receipt doctrine:

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

If tax rates are decreasing:

Jared, a tax novice, has recently learned of several foreign tax havens (i.e., countries with low tax rates). He is considering locating his manufacturing operations in one of these countries solely based on their low tax rates. What types of taxes is Jared ignoring? Explain how these other taxes may affect the viability of Jared's choice to locate in a foreign tax haven.

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 from a cash-flow perspective?

Danny argues that tax accountants suffer from one-mindedness in their attempts at tax planning (i.e., reducing taxes at all costs). Is Danny's view of tax planning correct - i.e., does he understand what the goal of tax planning is? Please elaborate.

If Joel earns a 10% after-tax rate of return, $10,000 received in two years is worth how much today? (round present and future value amounts to 3 places)

David, an attorney and cash basis taxpayer, is new to the concept of tax planning and recently learned of the timing strategy. To implement the timing strategy, David plans to establish a new policy that allows his clients to wait up to five years to pay their attorney fees. Assume that David expects his marginal tax rates to remain constant over the foreseeable future. What is wrong with this strategy?

Assume that Larry's marginal tax rate is 25%. If corporate bonds pay 10% interest, what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

Which of the following is an example of the timing strategy?

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?

Assume that Keisha's marginal tax rate is 40% and her tax rate on dividends is 15%. If a city of Atlanta bond pays 7.65% interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Keisha to be indifferent between the two investments from a cash-flow perspective?

The timing strategy becomes more attractive if a taxpayer is able to accelerate deductions by two or more years (versus one year).