Ch. 4 - Maxims of Income Tax Planning

Question 1

Tax planning

Answer 1

The structuring of transactions to reduce tax costs or increase tax savings to maximize net present value

Question 2

Tax avoidance

Answer 2

The implementation of legal strategies for reducing taxes

Question 3

Tax evasion

Answer 3

The willful and deliberate attempt to defraud the government by understating a tax liability through illegal means

Question 4

Describe the difference between tax avoidance and tax evasions

Answer 4

Tax avoidance uses legal means to reducing taxes whereas tax evasion uses illegal means and is a federal crime

Question 5

The tax consequences of a transaction depend on the interaction of _____ ______ common to all transactions. What are they?

Answer 5

Four variables;

1. The entity variable: which entity undertakes the transaction
2. The time period variable: during which tax year or years does the transaction occur?
3. The jurisdiction variable: in which tax jurisdiction does the transaction occur?

Question 6

In the federal tax system, which entities pay tax on business income?

Answer 6

Individuals and corporations

Question 7

True or false: sole proprietorships, LLCs, and S corporations are taxable entities

Answer 7

False (they are flow through entities)

Question 8

Individual tax rate percentages are currently between _____ and _____?

Answer 8

10% to 37%

Question 9

Corporate earnings are currently taxed at a flat rate of _______%?

Answer 9

21%

Question 10

Over 80 years ago, the Supreme Court decided that income must be taxed to _______, even if……

Answer 10

income must be taxed to the person who earns it, even if another person has legal right to the wealth represented by the income

(For example, a business owner who receives a $10k check in payment for services rendered to a client can’t avoid reporting $10k income by simply endorsing the check over to his or her child)

Question 11

Assignment of income doctrine

Answer 11

Income must be taxed to the entity that renders the service or owns the capital with respect to which the income is paid.

Question 12

In present value terms, a tax dollar paid this year costs ______ (more/less) than a tax dollar paid in a future year

Answer 12

more than

Question 13

What is the second maxim of income tax planning?

Answer 13

In present value terms, tax costs decrease (and cash flows increase) when a tax is deferred until a later taxable year

Question 14

What is the first income tax planning maxim?

Answer 14

Tax costs decrease (and cash flows increase) when income is generated by an entity subject to a lower tax rate

Question 15

Test