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Exam 3: Tax Planning Strategies and Related Limitations

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Question 61

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

A) increasing tax rates
B) a taxpayer with severe cash flow needs
C) if continuing an investment would generate a low rate of return
D) if continuing an investment would subject the taxpayer to unnecessary risk
E) None of these

F) B) and C)
G) D) and E)

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Question 62

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Jared, a tax novice, has recently learned of several foreign tax havens (i.e., countries with low tax rates). He is considering locating his manufacturing operations in one of these countries solely based on their low tax rates. What types of taxes is Jared ignoring? Explain how these other taxes may affect the viability of Jared's choice to locate in a foreign tax haven.

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The concept of implicit taxes suggests t...

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Question 63

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Explain why $1 today is not equal to $1 in the future. Why is understanding this concept particularly important for tax planning? What tax strategy exploits this concept?

Assume that Lavonia's marginal tax rate is 20%. If a city of Tampa bond pays 5% interest, what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

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

Assume that Shavonne's marginal tax rate is 50% and her tax rate on dividends is 15%. If a corporate bond pays 10.2% 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?

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

When considering cash outflows, higher present values are preferred.

In general, tax planners prefer to defer income. This 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.