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Exam 3: Tax Planning Strategies and Related Limitations

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Question 51

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Implicit taxes may reduce the benefits of the conversion strategy.

A) True
B) False

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Question 52

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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?

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Boeing should choose to operate the plan...

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Question 53

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

The income shifting and timing strategies are examples 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?

An investment's time horizon does not affect after-tax rates of return on investments taxed annually.

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

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.

Maurice is currently considering investing in a high dividend yield stock with no growth potentialthat 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?

The constructive receipt doctrine:

When considering cash outflows, higher present values are preferred.

The goal of tax planning generally is to:

The timing strategy is based on the idea that the location of where the income is taxedaffects the tax costs of the income.

Which of the following may limit the conversion strategy?

Tax savings generated from deductions are considered cash inflows.

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

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

Troy is not a very astute investor. He has a knack for investing in losing stocks. In his latestinvestment 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.

Investors must consider complicit taxes as well as explicit taxes in order to make correct investment choices.

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