Exam 4: Maxims of Income Tax Planning

Jelk Company is structuring a transaction that will generate $140,000 taxable revenue and cash inflow. Which of the following structures is the most effective in terms of the time period variable?

Income-shifting transactions occur more frequently between related parties than between unrelated parties.

Hilex Inc. liquidates its investment in General Electric corporate bonds and reinvests the proceeds in City of Miami municipal bonds. This tax planning strategy may be taking advantage of the:

In the United States, individuals and corporations are the two entities that pay tax on business income.

A planning strategy that defers a tax cost without deferring the receipt of before-tax cash flows decreases the NPV of the transaction.

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:

The tax law provides that individuals do not pay tax on the first $250,000 of gain realized on the sale of a principal residence. This rule is an example of the:

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

The rate at which an item of income is taxed depends on the tax character of the income.

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

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?

A strategy to shift income from one taxpayer to a different taxpayer reflects the entity variable, while a strategy to shift income from one year to a different year reflects the time period variable.

A taxpayer may choose to accept a reduced market rate of return on an investment to take advantage of a tax preference associated with the investment. In such case, the taxpayer will pay a/an:

JNC Company structured an income-generating transaction so that the income and cash flow shifted to Juno Inc. Presuming that JNC makes rational decisions, which of the following statements is false?

The goal of tax planning is to reduce tax costs or increase tax savings as much as possible.

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. Gregly's annual after-tax cash flow if it made the investment directly would be $201,000 ($300,000 taxable income - $99,000 tax cost). L'il Greg's annual after-tax cash flow would be $198,500 ($300,000 taxable income - $75,000 tax cost - $26,500 nondeductible expense.) Therefore, Gregly should make the investment directly.A. Should Gregly make the investment directly or make it through L'il Greg to maximize after-tax cash flow?B. L'il Greg's annual after-tax cash flow would be $205,125 ($300,000 - $26,500 deductible expense - $68,375 tax cost [$273,500 taxable income * 25%]). Therefore, Gregly should make the investment through L'il Greg.B.. Would your answer change if L'il Greg could deduct its $26,500 additional expense?

Which of the following statements about implicit and explicit taxes 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 avoidance is the reduction of a person's tax liability through illegal means.

Mrs. Day structures a transaction to shift income from her New York business to her New Hampshire business. This tax planning strategy may be taking advantage of the: