Question & Answer

{Planning}Tesha works for a company that pays a year-end bonus in January of each defer the bonus income.  Assume Congress recently passed tax legislation that decreases individual tax rates as of next year.  Does this increase or decrease the benefits of the bonus deferral this year?  What if Congress passed legislation that increased tax rates next year?  Should Tesha ask the company to change its policy this year?  What additional information do you need to answer this question?year (instead of December of the preceding year) to allow employees to

{Planning} Billups, a physician and cash-method taxpayer, is new to the concept of tax planning and recently learned of the timing strategy.  To implement the timing strategy, Billups plans to establish a new policy that allows all his clients to wait two years to pay their co-pays.  Assume that Billups does not expect his marginal tax rates to change.  What is wrong with his strategy?

Planning} Yong recently paid his accountant $10,000 for elaborate tax planning strategies that exploit the timing strategy.  Assuming this is an election year and there could be a power shift in the White House and Congress, what is a potential risk associated with Yong’s strategies?

“Tax avoidance is discouraged by the courts and Congress.”  Is this statement true or false?  Please explain.

What are the rewards of tax avoidance?  What are the rewards of tax evasion?

What is the difference between tax avoidance and tax evasion?

Describe the business purpose, step-transaction, and substance-over-form doctrines.  What types of tax planning strategies may these doctrines inhibit?

Relative to arm’s-length transactions, why do related-party transactions receive more IRS scrutiny?

Explain the assignment of income doctrine.  In what situations would this doctrine potentially apply?

What is the constructive receipt doctrine?  What types of taxpayers does this doctrine generally affect?  For what tax planning strategy is the constructive receipt doctrine a potential limitation

Several judicial doctrines limit basic tax planning strategies.  What are they?  Which planning strategies do they limit?

What is an “implicit tax” and how does it affect a taxpayer’s decision to purchase municipal bonds?

(1)   {Planning} Laurie is thinking about investing in one or several of the following investment options:

Corporate bonds (ordinary interest paid annually)

Dividend-paying stock (qualified dividends)

Life insurance (tax-exempt)

Savings account

Growth stock

a. Assuming all of the options earn similar returns before taxes, rank Laurie’s investment options from highest to lowest according to their after-tax returns.

b. Which of the investments employ the deferral and/or conversion tax planning strategies?

c. How does the time period of the investment affect the returns from these alternatives?

d. How do these alternative investments differ in terms of their nontax characteristics?

Under what circumstances would you expect the after-tax return from an investment in a capital asset to approach that of tax-exempt assets assuming equal before-tax rates of return?

Cameron purchases stock in Corporation X and in Corporation Y.  Neither corporation pays dividends.  The stocks both earn an identical before-tax rate of return.  Cameron sells stock in Corporation X after three years and he sells the stock in Corporation Y after five years.  Which investment likely earned a greater after-tax return?  Why?

Do after-tax rates of return for investments in either interest or dividend paying securities increase with the length of the investment?  Why or why not?

{Planning} Clark owns stock in BCS Corporation that he purchased in January of the current year.  The stock has appreciated significantly during the year.  It is now December of the current year, and Clark is deciding whether or not he should sell the stock.  What tax and nontax factors should Clark consider before making the decision on whether to sell the stock now?

Explain how implicit taxes may limit the benefits of the conversion strategy

What is needed to implement the conversion strategy?

What are some of the common examples of the conversion strategy?

Explain why paying dividends is not an effective way to shift income from a corporation to its owners.

What is the key factor in shifting income from a business to its owners?  What are some methods of shifting income in this context?

What are some ways that a parent could effectively shift income to a child?  What are some of the disadvantages of these methods?

Name three common types of income shifting.

What factors have to be present for income shifting to be a viable strategy?