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Found of Taxation
Chapter 4: Maxims of Income Tax Planning
| Term | Definition |
|---|---|
| tax planning | the structuring of transactions to reduce tax costs or increase tax savings to maximize net present value |
| tax avoidance | the implementation of legal strategies for reducing taxes |
| tax evasion | the willful and deliberate attempt to defraud the government by understating a tax liability through illegal means; also see criminal fraud |
| flow-through (pass-through) | a legal business entity that passes all its income onto the owners or investors of the business; common device to avoid double taxation on earnings |
| entity tax planning maxim | tax costs decrease (and cash flows increase) when income is generated by an entity subject to a low tax rate |
| assignment of income doctrine | income must be taxed to the entity that renders the service or owns the capital with respect to which the income is paid |
| time-period tax planning maxim | tax costs decrease (and cash flows increase) when a tax is deferred until a later taxable year (tax payment can be deferred independently or before-tax cash flows or when the value of the deferral exceeds any opportunity cost) |
| jurisdictional tax planning maxim | tax costs decrease (and cash flows increase) when income is generated in a jurisdiction with a low tax rate |
| ordinary income | any income that is not capital gain. Ordinary income is taxed at the regular individual or corporate tax rates |
| capital gain | gain realized on the sale or exchange of a capital asset and that may be eligible for a preferential tax rate |
| character tax planning maxim | tax costs decrease (and cash flows increase) when income is taxed at a preferential rate because of its character. |
| explicit tax | an actual tax liability paid directly to the taxing jurisdiction |
| implicit tax | the reduction in before-tax rate of return that investors are willing to accept because of the tax-favored characteristics of an investment |
| tax planning | the analysis of finances from a tax perspective, with the purpose of ensuring maximum tax efficiency |
| economic substance doctrine | a transaction that doesn’t change the taxpayer’s economic situation except by the tax savings from the transaction should be disregarded for tax purposes |
| business purpose doctrine | a transaction should not be effective for tax purposes unless it is intended to achieve a genuine and independent business purpose other than tax avoidance |
| substance over form doctrine | the IRS can look through the legal formalities to determine the economic substance (if any) of a transaction and to base the tax consequences on the substance instead of the form |
| step transaction doctrine | the IRS can collapse a series of intermediate transactions into a single transaction to determine the tax consequences of the arrangement in its entirety |
Created by:
ryanriggs18
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