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Exam 3: Tax Planning Strategies and Related Limitations

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Question 41

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Assume that Will's marginal tax rate is 32% and his tax rate on dividends is 15%.If a dividend-paying stock (with no growth potential) pays a dividend yield of 8%,what interest rate must the corporate bond offer for Will to be indifferent between the two investments from a cash-flow perspective?

A) 12%.
B) 11%.
C) 10%.
D) 8%.
E) None of the choices are correct.

F) A) and B)
G) None of the above

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Question 42

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

A) Assignment of income doctrine.
B) Business purpose doctrine.
C) Substance-over-form doctrine.
D) Step-transaction doctrine.
E) None of the choices are correct.

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

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Question 43

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The timing strategy is based on the idea that the location of where the income is taxed affects the tax costs of the income.

Which of the following is an example of 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.

Which of the following is an example of the timing 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? Use Exhibit 3.1.(Round present and future value amounts to 3 places)  

If Jim invested $100,000 in an annual-dividend paying stock today with a 7 percent return,what investment time period will give Jim the greatest after-tax return?

Bono owns and operates a sole proprietorship and has a 30% 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%.What could Bono do to reduce his family tax burden? How much pre-tax 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?

Which of the following increases the benefits of income deferral?

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

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

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?

Lucky owns a maid service that cleans several local businesses nightly.Lucky,a high-tax rate taxpayer,would like to shift some income to his son Rocco.Lucky tells all of his customers (who are always timely in their payments)to pay Rocco and then Rocco will report 50% of the income as a collection fee.Lucky will report the remaining 50%.Will this shift the income from Lucky to Rocco? Why or why not? What doctrines influence your answer? Any suggestions for Lucky?

Assume that Marsha is indifferent between investing in a city of Destin bond that pays 6% interest and a corporate bond that pays 8% interest.What is Marsha's marginal tax rate?

Lucinda is contemplating a long range planning strategy that will allow her to defer sizable portions of her income for 10 years.What type of planning strategy is she contemplating? What are some potential risks associated with this type of strategy?

Rolando's employer pays year-end bonuses each year on December 31.Rolando,a cash basis taxpayer,would prefer to not pay tax on his bonus this year.So,he leaves town on December 31,2017 and doesn't pick up his check until January 2,2018.When should Rolando report his bonus?

Assume that Javier is indifferent between investing in a city of El Paso bond that pays 5% interest and a corporate bond that pays 6.25% interest.What is Javier's marginal tax rate?

Which of the following tax planning strategies is based on the present value of money?