Exam 4: Maxims of Income Tax Planning

Gregly Company,which has a 33% marginal tax rate,plans to make an investment that should generate $300,000 annual cash flow/ordinary income.Instead of making the investment directly,Gregly could form a new taxable entity (L'il Greg)to make the investment.L'il Greg's marginal tax rate on the investment income would be only 25%.However,L'il Greg would have to incur a $26,500 annual nondeductible expense associated with the investment that Gregly would not incur. A.Should Gregly make the investment directly or make it through L'il Greg to maximize after-tax cash flow? B.Would your answer change if L'il Greg could deduct its $26,500 additional expense?

Mr.Bearne paid $50,000 to a local spiritual healer and deducted the payment as a business expense of his sole proprietorship.The healer provided personal counseling to Mr.and Mrs.Bearne.Upon audit of the sole proprietorship's accounting records,the IRS agent disallowed the deduction by applying the:

Hilex Inc.structures a transaction to shift income from one controlled subsidiary to another controlled subsidiary.This tax planning strategy may be taking advantage of the:

The assignment of income doctrine constrains tax deferral strategies.

Which of the following statements about tax legal doctrines is false?

Hilex Inc.structures a transaction to shift income from its California office to its Oregon office.This tax planning strategy may be taking advantage of the:

Mrs.Lester has the choice between two transactions.Transaction A will generate $175,000 taxable cash flow in the current year (year 0).Transaction B will generate $160,000 cash flow in the current year,but Mrs.Lester will not be required to report $160,000 income for two years (year 2).Mrs.Lester has a 40% marginal tax rate and uses a 9% discount rate to compute NPV.Use Appendix A of your textbook provided to determine which of the following statements is true?

Which of the following statements about tax strategies is false?

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

Tax evasion is a federal crime punishable by imprisonment.

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

Mr.Dole needed to sell appreciated stock out of his investment portfolio to generate cash to pay for his Christmas spending.He decided to postpone the sale from December 20Y1 until January 20Y2.Mr.Dole is taking advantage of the:

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 30% 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?

The business purpose doctrine allows the IRS to collapse a series of intermediate transactions into a single transaction to determine the tax consequences of the arrangement in its entirety.

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?

Mr.Fox has $200,000 to invest.He could buy corporate bonds with a 10% before-tax yield or tax-exempt bonds with an 8% before-tax yield.Which of the following statements is false?

Which of the following statements about the character variable is true?

Assume that Congress recently amended the tax law to provide for a maximum 12% rate on interest income from U.S.savings bonds.Compute the tax savings from this preferential rate for: A.Mrs.Edwin,who has a 15% marginal rate on ordinary income and earned $290 interest on her investment in U.S.savings bonds. B.Mr.Kalter,who has a 35% marginal rate on ordinary income and earned $290 interest on his investment in U.S.savings bonds.

Tatun Inc.pays state income tax at a 5% rate and federal income tax at a 34% 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.

Mrs.Day structures a transaction to convert income from ordinary income to capital gain.This tax planning strategy may be taking advantage of the: