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Exam 3: Tax Planning Strategies and Related Limitations

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Question 1

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

A) assignment of income doctrine.
B) business purpose doctrine.
C) substance-over-form doctrine.
D) step-transaction doctrine.
E) none of these.

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

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Question 2

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The timing strategy is particularly effective for cash basis taxpayers.

A) True
B) False

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Question 3

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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?

Which of the following is not required to determine the best timing strategy?

Which of the following increases the benefits of income deferral?

Nontax factors do not play an important role in tax planning.

Assume that Shavonne's marginal tax rate is 50% and her tax rate on dividends is 15%. If a corporate bond pays 10.2% interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Shavonne to be indifferent between the two investments from a cash-flow perspective?

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? (round present and future value amounts to 3 places)

If Julius has a 20% tax rate and a 10% after-tax rate of return, $25,000 of income in three years will cost him how much tax in today's dollars? (round present and future value amounts to 3 places)

Maurice is currently considering investing in a high dividend yield stock with no growth potential that pays a 6% dividend yield or bonds issued by The Coca Cola Company that pay 8%. If Maurice's ordinary tax rate is 25% and his dividend tax rate is 15%, which investment should he choose? Which investment should he choose if his ordinary tax rate is 30%? At what ordinary tax rate would he be indifferent to the stock or to the bond? What strategy is this decision based upon?

In general, tax planners prefer to defer income. This is an example of the conversion strategy.

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

Assuming an after-tax rate of return of 10%, John should prefer to pay an expense of $85 today instead of an expense of $100 in one year.

Assuming a positive interest rate, the present value of money suggests:

If tax rates are increasing:

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

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?

If tax rates are decreasing:

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

Future value can be computed as Future Value = Present Value/(1 + r)ⁿ.