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Exam 3: Tax Planning Strategies and Related Limitations

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Question 61

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

A) A corporation paying its shareholders a $20,000 dividend.
B) A parent employing her child in the family business.
C) A taxpayer gifting stock to his children.
D) A cash-basis business delaying billing its customers until after year end.
E) None of the choices are correct.

F) A) and E)
G) C) and E)

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Question 62

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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 63

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Assume that John's marginal tax rate is 40%.If a city of Austin bond pays 6% interest,what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds?

If Rudy has a 25% tax rate and a 6% after-tax rate of return,a $30,000 tax deduction in four years will save how much tax in today's dollars? Use Exhibit 3.1 in the text.(Round present and future value amounts to 3 places)

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? Qualified dividends are taxed at 15 percent.(Round your interim calculations to the nearest whole number) (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.

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

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?

The goal of tax planning generally is to:

Assume that Lucas' marginal tax rate is 30% and his tax rate on dividends is 15%.If a dividend-paying stock (with no growth potential) pays an 8% dividend yield,what interest rate would a municipal bond have to offer for Lucas to be indifferent between the two investments from a cash-flow perspective?

If tax rates are decreasing:

If tax rates are decreasing:

When considering cash outflows,higher present values are preferred.

The timing strategy becomes more attractive as tax rates decrease.

Which is not a basic tax planning strategy?

Bono owns and operates a sole proprietorship and has a 30% marginal tax rate.He provides his son,Richie,$12,000 a year for college expenses.Richie works as a street musician and has a marginal tax rate of 15%.What could Bono do to reduce his family tax burden? How much pre-tax income does it currently take Bono to generate the $12,000 after-taxes given to Richie? If Richie worked for his father's sole proprietorship,what salary would Bono have to pay him to generate $12,000 after taxes? (Ignore any Social Security,Medicare,or Self Employment Tax issues.)How much money would this strategy save?