Exam 4: Maxims of Income Tax Planning

OWB Inc. and Owin Inc. are owned by the same family. OWB's marginal tax rate is 30%, and Owin's marginal tax rate is 21%. OWB has the opportunity to engage in a transaction that will generate $250,000 taxable cash flow. Alternatively, Owin could engage in the transaction. However, Owin would incur an extra $60,000 deductible cash expense with respect to the transaction. Which of the following statements is true? 

The assignment of income doctrine constrains tax deferral strategies. 

Mrs Jax plans to pay $100,000 for one of three investment alternatives that have the same risk. The income from investment 1 would be taxed at Mrs Jax's 37% regular tax rate, the income from investment 2 would be taxed at a 20% preferential rate, and the income from investment 3 is tax-exempt. The investments offer the following before-tax yields. Investment 1: 8.25% Investment 2: 7.5% Investment 3: 6.0% Which investment should Mrs Jax select?

Which of the following statements is true? 

Understal Company has $750,000 to invest and two competing investment opportunities. Investment 1 would pay 9% per year ($67,500 annual before-tax cash flow). Investment 2 would pay 7% per year ($52,500 annual before-tax cash flow). The return on Investment 1 is taxable at Understal's 35% rate on ordinary income, while the return on Investment 2 is taxable at a 20% preferential rate. A. Compute the explicit and implicit tax that Understal would pay with respect to each investment. B. Which investment results in the greater after-tax cash flow?

Tax avoidance is the reduction of a person's tax liability through illegal means.

Varson Inc. and Vonsell Inc. are owned by the same family. The family decides to purchase $150,000 of deductible advertising that will benefit the businesses operated by both corporations. Which of the following statements is true?  

The time period variable reflects the fact that:  

The substance over form doctrine allows the IRS to look through the legal formalities of a transaction to determine its true economic nature. 

The after-tax cost of a dollar of deductible expense to a high-tax entity is less than the after-tax cost to a low-tax entity. 

Which of the following statements about implicit and explicit taxes is false?  

Tax evasion is a federal crime punishable by imprisonment. 

Mrs Bern's marginal tax rate is 35%, and her grandson Jeff's marginal tax rate is 12%. Which of the following statement is false? 

Mrs James plans to invest in one of two investment alternatives having the same risk. Investment 1 has a before-tax return of 10% and the income from investment 1 would be taxed at Mrs James' 35% regular tax rate. Investment 2 has a before-tax return of 8% and the income from investment 2 would be taxed at a 15% preferential rate. Which of the following statements regarding these investment choices is false?  

Tatun Inc. pays state income tax at a 5% rate and federal income tax at a 21% rate. Tatun recently engaged in a transaction in Mexico, which levied a $25,200 income tax on the transaction. Tatun's pretax net income for the current year is $1,913,900. Compute Tatun's total income tax burden assuming that: A. The Mexican tax is nondeductible for state and federal tax purposes. B. The Mexican tax is deductible for state and federal tax purposes.

Which of the following statements about tax strategies is false?  

Mrs Stout has a $35,000 capital gain eligible for a 28% preferential tax rate. Which of the following statements is false? 

A reduced market rate of return on a tax-favored investment is called an implicit tax.  

The tax character of an item of income depends on how the income is reported on the firm's financial statements.  

Elton Company plans to build a new facility to manufacture backpacks. Elton sells its backpacks across the country for $300 per pack. It could locate the plan in state A, which levies a 5 percent tax on business income. The estimated manufacturing cost per pack in state A would be $120. Alternatively, Elton could locate the plan in state B, which levies a 3 percent tax on business income. The estimated manufacturing cost in state B is $126 per pack. In which state should Elton locate its plant? Provide calculations to support your conclusion.