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28 Cards in this Set
- Front
- Back
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tax planning
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structuring of transactions to reduce tax costs or increase tax savings to maximize the NPV of transactions
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tax avoidance
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legitimate means of reducing taxes
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tax evasion
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illegal means of reducing taxes
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1st variable of tax consequences of a transaction
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The entity variable: Which entity undertakes the transaction
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2nd variable of tax consequences of a transaction
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The time period variable: During which tax year or years does the transaction occur?
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3rd variable of tax consequences of a transaction
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The jurisdiction variable: In which tax jurisdiction does the transaction occur
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4th variable of tax consequences of a transaction
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The character variable: What is the tax character of the income from the transaction.
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Entity variable
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Tax costs decrease (cash flows increase) when income is generated by an entity subject to a low tax rate.
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Income shifting
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income shifted from entity with high tax rate to entity with a low tax rate
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Deduction shifting
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shifting deduction expenses between entities
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Constraints on income Shifting
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If transacation serves no genuine purpose besides tax avoidance, the IRS may disallow the tax consequences intended by the parties.
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Income Doctrine
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income must be taxed to the entity that renders the service or owns the capital with respect to which the income is paid.
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Time period variable
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a tax dollar paid this year costs more than a tax dollar paid in the future. a tax dollar saved this year is worth more than a tax dollar saved in the future
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Time period variable continued
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-deferring payment of taxes may not affect NPV. Deffering taxes delays receipt of revenue
-deferral of income creates uncertainty because of rate changes |
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Jurisdiciton Variable
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Tax costs decrease (cash flows increase) when income is generated in a jurisdiction with a low tax rate.
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Character variable
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Taxed as Ordinary Income or Capital Gains
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Implicit tax
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reduced rate of return on tax-free investment to take advantage of the tax preferences
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tax planning maxim 1
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Tax costs decrease and cash flows increase when income is generated by an entity subject to a low tax rate
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tax planning maxim 2
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In present value terms, tax costs decrease and cash flows increase when a tax is deferred until a later taxable year
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tax planning maxim 3
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tax costs decrease and cash flows increase when income is taxed generated in a jurisdiction with a low tax rate
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tax planning maxim 4
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tax costs decrease and cash flows increase when income is taxed at a preferential rate because of its character
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Tax savings vs additional costs
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using more complex stragies might cost more than the tax savings
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Multilateral planning
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maximizing after tax value of the joint venture of 2 companies doing business
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Flexibility Factor
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company forms a corporation in a foreign land to minimize taxes. Tax laws change and it is very expensive to dissolve the Corporation
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Economic Substance Doctrine
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a transaction that doesn't change the tax payer's economic situation except for tax savings from the transaction can be disregared by the IRS
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Business purpose doctrine
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a transaction should not be effective for tax purposes unless it has a business purpose other than tax avoidance.
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substance over form doctrine
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IRS can look through the legal formalities to determine the economic substance of a transaction. If substance differs from form, IRS will base the tax consequences on the reality rather than the illusion
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step transaction doctrine
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IRS can collapse a series of intermediate transactions into a single transaction to determine the tax consequences of the arrangement in its entirety
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