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Exam 3: Tax Planning Strategies and Related Limitations

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Question 31

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The constructive receipt doctrine is more of an issue for cash-basis taxpayers.

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Question 32

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A common income-shifting strategy is to:

A) shift income from low tax rate taxpayers to high tax rate taxpayers.
B) shift deductions from low tax rate taxpayers to high tax rate taxpayers.
C) shift deductions from high tax rate taxpayers to low tax rate taxpayers.
D) accelerate tax deductions.
E) None of the choices are correct.

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Question 33

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An astute tax student once summarized that many of the tax planning strategies merely make use of the variation of taxation across different dimensions. Explain why this is true. Be specific.

Tax savings generated from deductions are considered cash inflows.

The income-shifting strategy requires taxpayers with varying tax rates.

The assignment of income doctrine is a natural limitation to the timing strategy.

The timing strategy becomes more attractive as tax rates decrease.

If tax rates are decreasing:

Assume that Shavonne's marginal tax rate is 37 percent and her tax rate on dividends is 15 percent. If a corporate bond pays 10.20 percent interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Shavonne to be indifferent between the two investments from a cash-flow perspective?

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

The constructive receipt doctrine is a natural limitation for the conversion strategy.

Troy is not a very astute investor. He has a knack for investing in losing stocks. In his latest investment move, he has realized a loss of about $40,000 (original basis of $50,000; current fair market value of $10,000)in High Tech, Inc. The good news is that unlike prior years, he actually has $45,000 of gains that he can use to offset the loss. Troy is considering either selling the High Tech, Inc. stock to his sister, Louise, or on the stock market. Which should he choose and why? Please explain why the IRS may treat the two transactions differently.

Investors must consider complicit taxes as well as explicit taxes in order to make correct investment choices.

The timing strategy is particularly effective for cash-basis taxpayers.

Paying "fabricated" expenses in high tax rate years is an example of:

Which of the following does not limit the income-shifting strategy?

Which of the following is an example of the timing strategy?

The timing strategy becomes more attractive if a taxpayer is able to accelerate deductions by two or more years (versus one year).

Assume that Jose is indifferent between investing in a corporate bond that pays 10 percent interest and a stock with no growth potential that pays an 8 percent dividend yield. Assume that the tax rate on dividends is 15 percent. What is Jose's marginal tax rate?

Bono owns and operates a sole proprietorship and has a 32 percent 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 percent. What could Bono do to reduce his family tax burden? How much pretax 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?