Question 1

Which of the following is an example of the income shifting strategy?

Accepted Answer

Paying the owner a salary allows for a deductible business expense, shifting income from the corporation to the owner's individual tax return. The other options may have tax implications, but do not involve income shifting strategy.

Question 2

Assume that John's marginal tax rate is 40%. If a city of Austin bond pays 6% interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds?

Accepted Answer

6%/(1 − 0.40) = 10.00%

Question 3

Jason's employer pays year-end bonuses each year on December 31. Jason, a cash basis taxpayer, would prefer to not pay tax on his bonus this year (and actually would prefer his daughter to pay tax on the bonus). So, he leaves town on December 31, 2017 and has his daughter, Julie, pick up his check on January 2, 2018. Who reports the income and when?

Accepted Answer

The answer of Jason's employer pays year-end bonuses each year...

Question 4

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

Accepted Answer

The timing strategy involves deferring income to a future year or accelerating deductions to the current year in order to minimize current tax liability. Paying outstanding bills by year end is an example of accelerating deductions, which reduces taxable income for the current year. The other options do not involve timing strategies.

Question 5

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

Accepted Answer

Choosing tax exempt municipal bonds is an example of a conversion strategy as it allows the high tax rate taxpayer to invest in a tax-free security to reduce their taxable income. The other options do not involve any form of conversion strategy.

Question 6

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?

Accepted Answer

5%/(1 − 0.20) = 6.25%

Question 7

Which of the following is needed to implement the income shifting strategy?

Accepted Answer

The income shifting strategy involves transferring income from a taxpayer with a higher tax rate to a taxpayer with a lower tax rate. Therefore, the strategy requires the presence of taxpayers with varying tax rates.

Question 8

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?

Accepted Answer

8% × (1 − mtr) = 6%; mtr = 1 − (6%/8%) = 25%

Question 9

Which of the following may limit the conversion strategy?

Accepted Answer

The answer of Which of the following may limit the...

Question 10

Assume that Keisha's marginal tax rate is 40% and her tax rate on dividends is 15%. If a city of Atlanta bond pays 7.65% interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Keisha to be indifferent between the two investments from a cash-flow perspective?

Accepted Answer

Div. Yield × (1 − 0.15) = 7.65%; Div. Yield = 7.65%/(1 − 0.15) = 9.00%

Question 11

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

Accepted Answer

The assignment of income doctrine applies to situations where income is transferred from one taxpayer to another. Employing a child in a family business could be seen as an attempt to shift income to a lower tax bracket or avoid taxes altogether, and is therefore more likely to receive IRS scrutiny. The other choices do not involve income shifting and are less likely to be scrutinized under this doctrine.

Question 12

Assume that Larry's marginal tax rate is 25%. If corporate bonds pay 10% interest, what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

Accepted Answer

10% × (1 − 0.25) = 7.50%

Question 13

Assume that Bill's marginal tax rate is 30%. If corporate bonds pay 8% interest, what interest rate would a municipal bond have to offer for Bill to be indifferent between the two bonds?

Accepted Answer

8% × (1 − 0.30) = 5.60%

Question 14

A common income shifting strategy is to:

Accepted Answer

The answer of A common income shifting strategy is to:
...

Question 15

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

Accepted Answer

The timing strategy involves carefully timing when certain financial events will occur, in order to achieve the greatest tax benefit. Delaying billing customers until after year end would potentially allow the company to defer receiving income until the following year, which could result in a lower tax liability for the current year. The other choices do not involve timing financial events for tax benefits.

Question 16

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?

Accepted Answer

6.25% × (1 − mtr) = 5%; mtr = 1 − (5%/6.25%) = 20%

Question 17

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

Accepted Answer

None of the choices limit the income shifting strategy. The listed doctrines are factors that may be considered by the IRS in determining the validity of income shifting transactions, but they do not necessarily stop taxpayers from using income shifting as a strategy.

Question 18

Assume that Lucas' marginal tax rate is 30% and his tax rate on dividends is 15%. If a dividend-paying stock (with no growth potential) pays an 8% 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?

Accepted Answer

8% × (1 − 0.15) = 6.80%

Question 19

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?

Accepted Answer

The assignment of income doctrine states that income must be taxed to the person who earns it. In this scenario, the taxpayer is attempting to assign the income from rent checks to her son, even though the son did not earn the income. This violates the assignment of income doctrine. The constructive receipt doctrine relates to income that is available for the taxpayer to receive but is not physically received yet. The implicit tax doctrine and step-transaction doctrine are not applicable to this scenario.

Question 20

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

Accepted Answer

The substance-over-form doctrine is likely violated here because the IRS could argue that the payment to the 10-year-old daughter for consulting does not reflect the economic reality of the transaction and is instead a means to shift income and reduce the taxpayer's tax liability. This doctrine allows the IRS to reclassify transactions based on their substance rather than their form.

Quiz 3: Tax Planning Strategies and Related Limitations

Which of the following is an example of the income shifting strategy?

Assume that John's marginal tax rate is 40%. If a city of Austin bond pays 6% interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds?

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

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

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?

Which of the following is needed to implement the income shifting strategy?

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?

Which of the following may limit the conversion strategy?

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

Assume that Larry's marginal tax rate is 25%. If corporate bonds pay 10% interest, what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

Assume that Bill's marginal tax rate is 30%. If corporate bonds pay 8% interest, what interest rate would a municipal bond have to offer for Bill to be indifferent between the two bonds?

A common income shifting strategy is to:

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

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 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?

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