Exam 4: Maxims of Income Tax Planning

Mr. Blau structured an income-generating transaction so that the $90,000 income and cash flow shifted to Mr. Blau's sister, Kim. If Mr. Blau's marginal tax rate is 35%, and Kim's tax rate is 15%, compute the tax savings from the income shift.

Mrs. Day structures a transaction to shift income from her 20Y1 tax year to her 20Y2 tax year. This tax planning strategy may be taking advantage of the:

Which of the following statements about ordinary income and capital gain is false?

Mr. Cox has the choice between two transactions. Transaction A will generate $500,000 taxable cash flow in the current year (year 0). Transaction B will generate $460,000 cash flow in the current year, but Mr. Cox will not be required to report $460,000 income until next year (year 1). Mr. Cox has a 40% marginal tax rate and uses a 10% discount rate to compute NPV. Which of the following statements is true?

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.

Hilex Inc. structures a transaction to shift income from its 20Y0 tax year to its 20Y2 tax year. This tax planning strategy may be taking advantage of the:

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.A. Understal would pay $23,625 explicit tax ($67,500 * 35%) and no implicit tax on Investment 1. It would pay $10,500 explicit tax ($52,500 * 20%) and $15,000 implicit tax (reduction in before-tax yield) on Investment 2.B. Investment 1 results in $43,875 after-tax cash flow, while Investment 2 results in $42,000 after-tax cash flow.B. Which investment results in the greater after-tax cash flow?

Which of the following statements about tax planning is false?

Which of the following statements about the time period variable is false?

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

The tax law applies uniformly to every commercial transaction by every business entity.

The time period variable is based on the time value of money.