Chp 3: Tax Planning Strategies And Related Limitations

Front 1

After-Tax Rate of Return

Back 1

1. A taxpayer's before-tax rate of return on an investment minus the taxes paid on the income from the investment.

2. after-tax rate of return that is taxed annually= before-tax rate of return*(1-marginal tax rate). r=R*(1-t).

3. A taxpayer's after=tax rate of return for an investment held for more than one tax period is r=(FV/I)^1/n -1:

a. r is the after-tax rate of return

b. FV is the after-tax future value of the investment.

c. I is the original investment amount

d. n is the number of periods the investment is held.

Front 2

arm's length transaction

Back 2

transactions among unrelated taxpayers, where each transacting party negotiates for his or her own benefit.

Front 3

Assignment of income doctrine

Back 3

1. Judicial doctrine holding that earned income is taxed to the taxpayer providing the service.

2. Income from property is taxed to the individual who owns the property when the income accrues.

Front 4

Before-tax rate of return

Back 4

A taxpayer's rate of return on an investment before paying taxes on the income from the investment.

Front 5

Business purpose doctrine

Back 5

The judicial doctrine that allows the IRS to challenge and disallow business expenses for transactions with no underlying business motivation.

Front 6

Constructive receipt doctrine

Back 6

1. The judicial doctrine that a taxpayer must recognize income when it is actually or constructively received.

2. Deemed to have occurred if:
a. the income has been credited to the taxpayer's account or if the income is unconditionally available to the taxpayer
b. the taxpayer is aware of the income's availability
c. and there are no restrictions on the taxpayer's control over the income.

Front 7

Discount factor

Back 7

The factor based on the taxpayer's rate of return that is used to determine the present value of future cash inflows(tax savings) and outflows(taxes paid).

Front 8

Implicit tax

Back 8

1. indirect taxes that result from a tax advantage the government grants to certain transactions to satisfy social, economic, or other objectives.

2. Reduced before-tax return that a tax-favored asset produces because of its tax advantaged status.

Front 9

Present value

Back 9

Concept that $1 today is worth more than $1 in the future because of interest.

Front 10

Related-party transaction

Back 10

Financial activities among family members, among owners, and their businesses, or other businesses owned by the same owners.

Front 11

Step-transaction doctrine

Back 11

Judicial doctrine that allows IRS to collapse a series of related transactions into one transaction to determine the tax consequences of the transaction.

Front 12

Substance-over-form doctrine

Back 12

Judicial doctrine that allows IRS to consider the transaction's substance regardless of its form and, where appropriate, reclassify the transaction, according to its substance.

Front 13

Tax avoidance

Back 13

The legal act of arranging one's transactions or affairs to reduce taxes paid.

Front 14

Tax evasion

Back 14

1. The willful attempt to defraud the government, such as by not paying taxes legally owned.

2. Falls outside the confines of legal tax avoidance.

Front 15

Economic Substance doctrine

Back 15

1. Requires transactions to meet two criteria to obtain tax benefits:

a. Transaction must meaningfully change a taxpayer's economic position(excluding any federal income tax effects).

b. The taxpayer must have a substantial purpose (other than tax avoidance) for the transaction.

3. Clearly related to several other doctrines, such as business purpose, step transaction, and substance-over-form doctrine.