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Tax 2012 Ch. 4
Principles of Taxation for Business and Investment Planning, Ch. 4
| Question | Answer |
|---|---|
| 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 |
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