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Exam 3: Tax Planning Strategies and Related Limitations

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Question 41

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

A) True
B) False

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Question 42

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Rodney, a cash basis taxpayer, owes $40,000 in tax deductible consulting fees for his business. Assume that it is December 28 and that Rodney can avoid any finance charges if he pays the accounting fees by January 10. Rodney's tax rate this year is 30% and his after-tax rate of return is 10%. At what tax rate next year, will Rodney be indifferent between paying the $40,000 this year and next year?

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If Rodney pays the $40,000 in December, ...

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Question 43

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

The downside of tax avoidance includes the potential of stiff monetary penalties and imprisonment.

Which of the following increases the benefits of income deferral?

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:

The timing strategy becomes more attractive as tax rates decrease.

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

The concept of present value is an important part of the timing strategy.

Susan Brown has decided that she would like to go back to school after her kids leave home in five years. To save for her education, Susan would like to invest $25,000 in an investment that provides a high return. If her marginal tax rate is 35 percent, what is Susan's after-tax rate of return for the following investment options? (1) Corporate bond issued at face value with 10 percent stated interest rate payable annually (2) Dividend-paying stock with an annual qualifying dividend equal to 10% of her investment (3) Growth stock with an annual growth rate of 8 percent and no dividends paid. (Round your interim calculations to the nearest whole number)

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

Which of the following is an example of the income shifting strategy?

If Scott earns a 12% after-tax rate of return, $15,000 today would be worth how much to Scott in 2 years? (round present and future value amounts to 3 places)

If Thomas has a 40% tax rate and a 6% after-tax rate of return, $50,000 of income in five years will cost him how much tax in today's dollars? (round present and future value amounts to 3 places)

Based only on the information provided for each scenario, determine whether Kristi or Cindy will benefit more from using the timing strategy and why there will be a benefit to that person. a. Kristi has a 40% tax rate and can defer $20,000 of income. Cindy has a 30% tax rate and can defer $30,000 of income. b. Kristy has a 30% tax rate, a 10% after-tax rate of return, and can defer $25,000 of income for three years. Cindy has a 40% tax rate, an 8% after-tax rate of return, and can defer $20,000 of income for four years.

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

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

The conversion strategy capitalizes on the fact that tax rates vary across different activities.

The goal of tax planning is tax minimization.