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Chapter 4 - C hapter 4 Maxims of Income Tax Planning...

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Chapter 4 - Maxims of Income Tax Planning Chapter 4 Questions and Problems for Discussion 1. a. Mr. L is engaging in tax evasion because he is deliberating understating income (and thus  his tax liability) for the year.  b. Mr. P is engaging in tax avoidance. He has not earned any income that he fails to report.  Instead, he is giving his son an opportunity to earn income that will be taxed at a lower  marginal rate than if Mr. P earned it. c. Mrs. Q is engaging in tax evasion because she is deliberately violating the rule requiring  taxpayers to report and pay tax on income in the proper year. She is filing her prior year  return based on false information (the year of sale).   2. Because the preferential tax rate increases the after-tax rate of return on investments in single- family rental houses, the value of such houses should increase compared to the value of other  investments until the after-tax rate of return decreases to restore market equilibrium.  3. Because of the time value of money, the cost of a tax dollar paid in the future is less than the  cost of a current tax dollar. If a tax payment can be postponed for many years, its cost  in present  value terms  may be negligible.  4. As a general rule, the measurement of business income is not affected by the choice of entity  form. Mrs. K’s business operation should generate the same taxable income regardless of its  organization as a sole proprietorship or as a corporation. 5. Businesses organized as sole proprietorships, partnerships, limited liability companies (LLCs),  and S corporations are not taxable entities. Only businesses organized as corporations are  taxable entities separate and distinct from their owners.  6. a. The corporation’s marginal rate is 15 percent.  b. The corporation’s marginal rate is 39 percent.  c. The individual’s marginal rate is 30 percent.  d. The individual’s marginal rate is 35 percent.  7. a. If the tax rate is truly flat (every dollar of business income is taxed at the same rate,  regardless of the entity earning the dollar), the entity variable would be irrelevant in  developing tax planning strategies.  b. A flat tax rate would not affect the time period variable.  c. A flat  federal  income tax rate would not affect the jurisdictional variable because state and  local governments and foreign taxing jurisdictions would impose different rates on taxable  income.  d. If the tax rate is flat, no special category of income is subject to a preferential rate. However,  other special characteristics (such as the U.S. source versus foreign source characteristic)  might continue to be important in developing tax planning strategies.  4-1
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