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Exam 3: Tax Planning Strategies and Related Limitations

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Question 51

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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 percent of the income as a collection fee.Lucky will report the remaining 50 percent.Will this shift the income from Lucky to Rocco? Why or why not? What doctrines influence your answer? Any suggestions for Lucky?

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While Rocco's collection efforts are lik...

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Question 52

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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 five years or a smaller lump sum now.Advise O'Reilly on his choice under the following scenarios.Which option should he take and why? Use Exhibit 3.1. a.O'Reilly's after-tax return is 10 percent.If he chooses the current lump-sum option,the lottery will pay him $130 million. b.O'Reilly's after-tax return is 10 percent.His current tax rate will be 35 percent if he receives the lottery payment now.His expected tax rate in five years will be 40 percent.If he chooses the current lump-sum option,the lottery will pay him $100 million.

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(a)If O'Reilly takes the current lump-su...

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Question 53

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The downside of tax avoidance includes the potential of stiff monetary penalties and imprisonment.

Assuming a positive interest rate,the present value of money suggests:

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

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

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

A taxpayer instructing her son to collect rent checks for the taxpayer's property and to report this as taxable income on the son's tax return violates which doctrine?

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

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

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?

When considering cash inflows,higher present values are preferred.

If Joel earns a 10 percent after-tax rate of return,$10,000 received in two years is worth how much today? Use Exhibit 3.1.(Round discount factor(s) to three decimal places.)

Based only on the information provided for each scenario,determine whether Kristi or Cindy will benefit more from using the timing strategy and why there will be a benefit to that person.Use Exhibit 3.1. (Round discount factor(s)to three decimal places.) a.Kristi has a 40 percent tax rate and can defer $20,000 of income.Cindy has a 30 percent tax rate and can defer $30,000 of income. b.Kristy has a 30 percent tax rate and a 10 percent after-tax rate of return and can defer $25,000 of income for three years.Cindy has a 40 percent tax rate and an 8 percent after-tax rate of return and can defer $20,000 of income for four years.

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

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

The concept of present value is an important part of the timing strategy.

Danny argues that tax accountants suffer from one-mindedness in their attempts at tax planning (i.e.,reducing taxes at all costs).Is Danny's view of tax planning correct-i.e.,does he understand what the goal of tax planning is? Please elaborate.

Tax savings generated from deductions are considered cash inflows.

If Julius has a 32 percent tax rate and a 10 percent after-tax rate of return,a $40,000 tax deduction in two years will save how much tax in today's dollars? Use Exhibit 3.1.(Round discount factor(s) to three decimal places.)