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Exam 3: Tax Planning Strategies and Related Limitations

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Question 61

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Which of the following is more likely to receive IRS scrutiny under the assignment of income doctrine?

A) A corporation paying its shareholders a $20,000 dividend.
B) A parent employing her child in the family business.
C) A taxpayer gifting stock to his children.
D) A cash-basis business delaying billing its customers until after year end.
E) None of the choices are correct.

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

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Question 62

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One limitation of the timing strategy is the difficulties in accelerating a tax deduction without accelerating the actual cash outflow that generates the tax deduction.

A) True
B) False

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Question 63

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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?

If Nicolai earns an 8% after-tax rate of return,$20,000 today would be worth how much to Nicolai in 5 years? Use Future value of $1.(Round present and future value factor(s) to 5 decimal places.)  

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

Assume that Juanita is indifferent between investing in a corporate bond that pays 10.20% interest and a stock with no growth potential that pays a 6% dividend yield.Assume that the tax rate on dividends is 15%.What is Juanita's marginal tax rate?

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

The timing strategy becomes more attractive as interest rates (i.e.,rates of return)increase.

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

Which of the following decreases the benefits of accelerating deductions?

If tax rates will be higher next year,taxpayers should accelerate their deductions regardless of their after-tax rate of return.

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?

Based only on the information provided for each scenario,determine whether Kristi or Cindy will benefit more from using the timing strategy and why there will be a benefit to that person.Use Exhibit 3.1. (Round discount factor(s)to 3 decimal places.)   a.Kristi has a 40% tax rate and can defer $20,000 of income.Cindy has a 30% tax rate and can defer $30,000 of income. b.Kristy has a 30% tax rate,a 10% after-tax rate of return,and can defer $25,000 of income for three years.Cindy has a 40% tax rate,an 8% after-tax rate of return,and can defer $20,000 of income for four years.

The income shifting and timing strategies are examples of:

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