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Exam 3: Tax Planning Strategies and Related Limitations

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Question 21

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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?

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While Rocco's collection efforts are lik...

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Question 22

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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?

A) constructive receipt doctrine
B) implicit tax doctrine
C) assignment of income doctrine
D) step-transaction doctrine
E) None of these

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

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Question 23

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The constructive receipt doctrine is a natural limitation for the conversion strategy.

If tax rates are decreasing:

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

Which of the following is needed to implement the income shifting strategy?

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

Richard recently received $10,000 of compensation for some consulting work (paid in cash). Jeffrey recently received $10,000 of interest income from City of Dallas bonds. Both taxpayers report no taxable income from these transactions. Is this considered tax avoidance or tax evasion? What is the difference, if any, between the two?

Assume that Larry's marginal tax rate is 25%. If corporate bonds pay 10% interest, what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

The income shifting strategy requires taxpayers with varying tax rates.

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

A taxpayer paying his 10 year old daughter $50,000 a year for consulting likely violates which doctrine?

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?

The rewards of tax avoidance include stiff monetary penalties and imprisonment.

If tax rates are increasing:

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

If Julius has a 30% tax rate and a 10% after-tax rate of return, a $40,000 tax deduction in two years will save how much tax in today's dollars (rounded) ?

If Nicolai earns an 8% after-tax rate of return, $20,000 today would be worth how much to Nicolai in 5 years?

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?

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.