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Tax 2012 Ch. 4

Principles of Taxation for Business and Investment Planning, Ch. 4

QuestionAnswer
Tax avoidance the legal method of structuring affairs to reduce your tax burden
Tax evasion the illegal method of structuring affairs to avoid your legal obligation
The tax consequences of a transaction depend on the interaction of what 4 tax planning variables? 1) entity, 2) time period, 3) jurisdiction, and 4) character
The entity variable says that tax on business income depends on the difference in tax rates across entities. True or False? True
Individuals and corporations have different tax rates. This is an example of the _________ variable. Entity variable
Generally, taxable income is computed under (the same/different) rules across business entities. the same
Individual taxpayers have a ________ tax rate structure ranging from 10-35%. progressive
Corporate taxpayers have a ________ tax rate structure ranging from 15-39%. progressive
What is the planning opportunity that involves the entity variable? Shifting income and deductions between entities based on their relative tax rates. Shifting income and deductions between entities based on their relative tax rates.
When planning taxes you should shift income to a (lower/higher) rate entity and shift deductions to a (lower/higher) rate entity. lower, higher
What doctrine puts a restraint on income shifting and abusing the entity variable? The assignment of income doctrine.
The assignment of income doctrine states that… income must be taxed to the entity that earns the income.
Income generated by capital is taxed to the entity that owns the capital because of the ______ __ _____ doctrine. Assignment of Income
As a general rule, prudent tax planning around the time period variable will include what 2 things? 1) Deferring income to future periods and 2) Accelerating deductions.
Shifting tax costs to a later period may involve postponing a cash inflow to a later period. This is considered the _____________ cost of planning around the time period variable. opportunity
The opportunity cost of shifting tax costs to a later period (based on the time period variable) is because of the _______ ________ __________. net present value or time value of money.
There is a risk using the time period variable that future tax rates will ___________. increase
According to the jurisdiction variable: local , state, and foreign tax laws differ resulting in ____________. lower tax rates across jurisdictions.
Shifting income to a jurisdiction with a lower tax rate is based on the ___________ variable. jurisdiction
Tax character is determined strictly by ___________. law
Every income item is characterized as either ___________ _________ or _______ _________. ordinary income or capital gains.
Ordinary income includes: 1) Regular business activities and 2) Investments
Capital gains include: 1) Income generated by the sale and/or exchange of capital assets.
Most ordinary income is taxed at irregular rates. True or False? False
Qualified dividends are taxed at a preferential rate for individuals only. True or False? True
Capital gains are taxed at a preferential rate for individuals, but at regular rates for corporations. True or False? True
The planning opportunity for the character variable involves arranging transactions to convert ____ _______ to ________ ________. ordinary income, capital gains. Not easy because Congress prevents it.
You should deal with a conflict in tax planning by remembering _ _ _! N P V
The purpose of tax planning is (NPV maximization, tax minimization), not (NPV maximization, tax minimization). NPV maximization, tax minimization
A reduced before-tax rate of return on a tax favored investment is called an _________ tax. implicit
The three legal doctrines the IRS uses the most to challenge a tax planning strategy are: 1) _________, 2) _________, and 3) ________. Business purpose, substance over form, and step transaction
What is the doctrine that states “Even if a planning strategy is consist with the law, but has no business purpose. It is not a valid strategy.” the business purpose doctrine
The business purpose doctrine states that a tax planning strategy must have a legitimate ______ _______. business purpose
The substance over form doctrine says that the IRS has the right to look through the legal formalities to determine the economic substance of a transaction. True or False? True
The step transaction doctrine states that the IRS can collapse a series of transactions into a single transaction to determine the tax consequences of the arrangement in its entirety. True or False? True
The ______________ doctrine allows the IRS to collapse a transaction down to a single step. the step transaction doctrine
The ____________ doctrine states that the government has the right to look at the economic substance of a transaction to determine its purpose. substance over form
Created by: Darren Leitzke Darren Leitzke on 2011-10-15



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