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Exam 3: Tax Planning Strategies and Related Limitations

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Question 31

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A common income shifting strategy is to:

A) shift income from low tax rate taxpayers to high tax rate taxpayers.
B) shift deductions from low tax rate taxpayers to high tax rate taxpayers.
C) shift deductions from high tax rate taxpayers to low tax rate taxpayers.
D) accelerate tax deductions.
E) None of these.

F) A) and B)
G) A) and C)

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Question 32

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

A) True
B) False

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Question 33

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

An astute tax student once summarized that many of the tax planning strategies merely make use of the variation of taxation across different dimensions. Explain why this is true. Be specific.

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 based upon tax considerations only? Why do you think the plant in the state with a lower tax rate would produce a lower pre-tax income?

Assume that Will's marginal tax rate is 32% and his tax rate on dividends is 15%. If a dividend-paying stock (with no growth potential) pays a dividend yield of 8%, what interest rate must the corporate bond offer for Will to be indifferent between the two investments from a cash-flow perspective?

Implicit taxes may reduce the benefits of the conversion strategy.

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)

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

Paying "fabricated" expenses in high tax rate years is an example of:

Assume that Bill's marginal tax rate is 30%. If corporate bonds pay 8% interest, what interest rate would a municipal bond have to offer for Bill to be indifferent between the two bonds?

If tax rates will be higher next year, taxpayers should defer their income to next year regardless of their after-tax rate of return.

Bobby and Whitney are husband and wife and Whitney operates a sole proprietorship. They expect their joint taxable income next year to be $225,000, of which $150,000 is attributed to the sole proprietorship. Whitney is contemplating incorporating the sole proprietorship. Using the 2016 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?

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% of the income as a collection fee. Lucky will report the remaining 50%. Will this shift the income from Lucky to Rocco? Why or why not? What doctrines influence your answer? Any suggestions for Lucky?

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?

In general, tax planners prefer to accelerate deductions.

Rolando's employer pays year-end bonuses each year on December 31. Rolando, a cash basis taxpayer, would prefer to not pay tax on his bonus this year. So, he leaves town on December 31, 2016 and doesn't pick up his check until January 2, 2017. When should Rolando report his bonus?

Tax savings generated from deductions are considered cash inflows.

Jayzee is a single taxpayer who operates a sole proprietorship. He expects his taxable income next year to be $150,000, of which $125,000 is attributed to his sole proprietorship. Jayzee is contemplating incorporating his sole proprietorship. Using the 2016 single individual tax brackets and the corporate tax brackets, how much current tax could this strategy save Jayzee? (Ignore any Social Security, Medicare, or Self Employment Tax issues.) How much income should be retained in the corporation?

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.