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Exam 3: Tax Planning Strategies and Related Limitations

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Question 31

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Maurice is currently considering investing in a high dividend yield stock with no growth potential that pays a 6% dividend yield or bonds issued by The Coca Cola Company that pay 8%. If Maurice's ordinary tax rate is 25% and his dividend tax rate is 15%, which investment should he choose? Which investment should he choose if his ordinary tax rate is 30%? At what ordinary tax rate would he be indifferent to the stock or to the bond? What strategy is this decision based upon?

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Maurice's after tax rate of return on th...

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Question 32

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A taxpayer paying his 10 year old daughter $50,000 a year for consulting likely violates which doctrine?

A) constructive receipt doctrine
B) implicit tax doctrine
C) substance-over-form doctrine
D) step-transaction doctrine
E) None of these

F) A) and D)
G) D) and E)

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Question 33

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The goal of tax planning generally is to:

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

Virtually every transaction involves the taxpayer and two other parties that have an interest in the tax ramifications of the transaction.

If Lucy earns a 6% after-tax rate of return, $8,000 received in four years is worth how much today?

Tax avoidance is a legal activity that forms the basis of the basic tax planning strategies discussed in class.

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

The timing strategy becomes more attractive as tax rates decrease.

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

Which of the following does not limit the benefits of deferring income?

Luther was very excited to hear about the potential tax savings from shifting income from his corporation to him. The next day he had his corporation declare a $30,000 dividend to him. Is this an effective income shifting strategy? If so, why? If not, why not? What recommendations do you have for Luther?

When considering cash inflows, higher present values are preferred.

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

If tax rates will be lower next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.

The goal of tax planning is tax minimization.

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

Which of the following is needed to implement the income shifting strategy?

O'Reilly is a masterful lottery player. The megamillion jackpot is now up to $200 million. If O'Reilly wins the jackpot, he has a choice of receiving $200 million in 5 years or a smaller lump sum currently. Advise O'Reilly on his choice under the following scenarios. Which option should he take and why? a. O'Reilly's after tax return is 10%. If he chooses the current lump sum option, the lottery will pay him $130 million. b. O'Reilly's after-tax return is 10%. His current tax rate will be 35% if he receives the lottery payment now. His expected tax rate in five years will be 40%. If he chooses the current lump sum option, the lottery will pay him $100 million.

Rob is currently considering investing in municipal bonds that earn 4% interest or taxable bonds issued by Dell Computer that pay 6.5%. If Rob's tax rate is 20%, which bond should he choose? Which bond should he choose if his tax rate is 30%? At what tax rate would he be indifferent to the municipal bond or to the corporate bond? What strategy is this decision based upon?