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Exam 3: Tax Planning Strategies and Related Limitations

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Question 21

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

A) increasing tax rates
B) a taxpayer with severe cash flow needs
C) if continuing an investment would generate a low rate of return
D) if continuing an investment would subject the taxpayer to unnecessary risk
E) None of these

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

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Question 22

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If tax rates are decreasing:

A) taxpayers should accelerate income
B) taxpayers should defer deductions
C) taxpayers should defer income
D) taxpayers should defer deductions and accelerate income
E) None of these

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

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Question 23

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Compare and contrast the constructive receipt doctrine and the assignment of income doctrine.In what situations do these doctrines apply? What tax planning strategies does each doctrine limit?

Which of the following decreases the benefits of accelerating deductions?

The business purpose,step-transaction,and substance-over-form doctrines may limit the income shifting strategy.

The income shifting and timing strategies are examples of:

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

If Joel earns a 10% after-tax rate of return,$10,000 received in two years is worth how much today (rounded) ?

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,Inc.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,Inc.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.

Paying dividends to shareholders is one effective way of shifting income from a corporation to its shareholders.

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?

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.

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.

A common income shifting strategy is to:

Jason's employer pays year-end bonuses each year on December 31.Jason,a cash basis taxpayer,would prefer to not pay tax on his bonus this year (and actually would prefer his daughter to pay tax on the bonus) .So,he leaves town on December 31,2013 and has his daughter,Julie,pick up his check on January 2^nd,2014.Who reports the income and when?

Assume that Juanita is indifferent between investing in a corporate bond that pays 10.2% 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 timing strategy is particularly effective for cash basis taxpayers.

When considering cash inflows,higher present values are preferred.

If Lucy earns a 6% after-tax rate of return,$8,000 received in four years is worth how much today?

Which of the following increases the benefits of income deferral?