8e-sm-12 - Federal Tax Research, Eighth Edition Page 12-1...

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Federal Tax Research, Eighth Edition Page 12-1 CHAPTER 12 TAX PLANNING EXERCISES 12-1. a. Av and Cl b. Cl and Po c. Sp and Av d. Sp e. Av and Cl f. Cl g. Cl, Po, and Sp Exhibit 12-5 12-2. a. Ju and Po b. Ju and non-tax considerations c. Ju and non-tax considerations d. None. This is tax evasion. e. Cl and Sp f. Cl, Po, and Sp g. Av Exhibit 12-5 12-3. Answers will vary by student. 12-4. Taxes represent an additional cost of doing business or of accumulating wealth. Taxpayers employ tax planning techniques to accomplish an overall goal of wealth maximization, specifically, by reducing the net present value of the lifetime tax liability. Page 420 12-5. Tax planning is not the simple reduction of nominal tax liabilities. Example 12-1 illustrates how a higher nominal tax charge can produce a lower present value of the tax liability, because of the period of deferral and the return on investment during that time.
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Page 12-2 INSTRUCTORS MANUAL 12-6. Proportional Federal excise, Social Security Medicare, local property Progressive Federal income, estate, gift Regressive State sales, Social Security retirement Pages 417 through 419 12-7. Inconsistent treatment is afforded the two taxpayers in the following examples. When a corporation pays dividends to a sole owner-employee, the owner-employee recognizes gross income, but the corporation receives no deduction. To the extent the owner-employee is paid a reasonable salary, he or she recognizes gross income and the corporation receives a deduction. To the extent that the owner-employee receives certain employee fringe benefits, he or she is not required to recognize taxable income, and the corporation is allowed an ordinary business expense deduction. Therefore, to take advantage of this inconsistency, the owner-employee should receive all allowable fringe benefits and be paid a reasonable salary, rather than be paid dividends. Employer-furnished meals and lodging are not included in the gross income of the receiving employee under § 119, if certain requirements are met. Moreover, the costs are deduct ible by the employer. Therefore, an employee-owner of a corporation might both deduct the costs and avoid income recognition. Pages 427 through 429 12-8. A taxpayer might convert ordinary income into capital gains by providing a special financing arrangement for the sale of capital assets to another party. For example, the taxpayer could structure the terms of the sale to include a $6,000 sales price to be paid in a number of installments at 5% interest, rather than a $5,000 sales price with a 10% interest rate. Consequently, the seller would recognize more capital gain and less interest income. However, the transaction would have to be structured in a manner that would not change the character of the income under the below market rate loan rules or the original issue discount rules. A second method of shifting ordinary income into capital gains would be to purchase capital
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8e-sm-12 - Federal Tax Research, Eighth Edition Page 12-1...

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