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Exam 3: Tax Planning Strategies and Related Limitations

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Question 1

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Implicit taxes may reduce the benefits of the conversion strategy.

A) True
B) False

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Question 2

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

A) A corporation paying its shareholders a $20,000 dividend.
B) A corporation paying its owner a $20,000 salary.
C) A high tax rate taxpayer investing in tax exempt municipal bonds.
D) A cash-basis business delaying billing its customers until after year end.
E) None of the choices are correct.

F) A) and C)
G) A) and B)

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Question 3

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Based only on the information provided for each scenario, determine whether Eddy or Scott will benefit more from using the timing strategy and why there will be a benefit to that person. Exhibit 3.1. a. Eddy has a 40% tax rate. Scott has a 30% tax rate. b. Eddy and Scott each have a 40% tax rate. Eddy has $10,000 of income that could be deferred; Scott has $20,000 of income that could be shifted. c. Eddy and Scott each have a 40% tax rate and $20,000 of income that could be deferred. Eddy's after-tax rate of return is 8%. Scott's after-tax rate of return is 10%. d. Eddy and Scott each have a 40% tax rate, $20,000 of income that could be deferred, and an after-tax rate of return of 10%. Eddy can defer income up to 3 years. Scott can defer income up to 2 years.

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

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.

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

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

The income shifting and timing strategies are examples of:

When considering cash outflows, higher present values are preferred.

If Scott earns a 12% after-tax rate of return, $15,000 today would be worth how much to Scott in 2 years? Future value of $1. (Round present and future value factor(s) to 5 decimal places.)

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

The present value concept becomes more important as interest rates increase.

Richard recently received $10,000 of compensation for some consulting work (paid in cash). Jeffrey recently received $10,000 of interest income from City of Dallas bonds. Both taxpayers report no taxable income from these transactions. Is this considered tax avoidance or tax evasion? What is the difference, if any, between the two?

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

The constructive receipt doctrine is a natural limitation for the conversion 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?

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

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?

One limitation of the timing strategy is the difficulties in accelerating a tax deduction without accelerating the actual cash outflow that generates the tax deduction.

The business purpose, step-transaction, and substance-over-form doctrines may limit the income shifting strategy.