Chapter 03 – Tax Planning Strategies and Related Limitations
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Chapter 3
Tax Planning Strategies and Related Limitations
Homework Solutions
Discussion Questions
1.
7. [LO2] What factors increase the benefits of accelerating deductions or deferring
income?
Higher tax rates, higher interest rates, larger transaction amounts, and the
ability to accelerate deductions by two or more years increase the benefits of
accelerating deductions. Likewise, higher tax rates, higher interest rates, larger
transaction amounts, and the ability to defer revenue recognition for longer
periods of time increase the benefits of income deferral.
14. [LO4] Name three common types of income shifting.
Income shifting from high tax rate parents to low tax rate children; income
shifting from businesses to their owners; taxpayers shifting income from high-
tax jurisdictions to low-tax jurisdictions.
22. [LO6] What is the constructive receipt doctrine? What types of taxpayers does
this doctrine generally affect? For what tax planning strategy is the constructive
receipt doctrine a potential limitation?
The constructive receipt doctrine limits income deferral (i.e., the timing
strategy) for cash-method taxpayers. Unlike accrual-method taxpayers, cash-
method taxpayers report income for tax purposes when the income is received
(in the form of cash, property, services, etc.). The cash method affords
taxpayers some leeway in timing when to recognize income because, to some
extent, taxpayers can control when they receive income (e.g., by accelerating or
deferring billing their clients). The constructive receipt doctrine provides that a
taxpayer must recognize income when it is actually or constructively received.
Constructive receipt is deemed to have occurred if the income has been credited
to the taxpayer’s account or if the income is unconditionally available to the
taxpayer, the taxpayer is aware of the income’s availability, and there are no
restrictions on the taxpayer’s control over the income.
Chapter 03 – Tax Planning Strategies and Related Limitations
28.[LO7] “Tax avoidance is discouraged by the courts and Congress.” Is this
statement true or false? Please explain.
False. The courts have often made it quite clear that taxpayers are under no
obligation to pay more taxes than required by law. As an example, in
Commissioner v. Newman, 159 F.2d 848 (2 Cir., 1947), which considered a
taxpayer’s ability to shift income to his children using trusts, Judge Learned
Hand included the following statement in his dissenting opinion.
“Over and over again courts have said that there is nothing sinister in so
arranging one’s affairs as to keep taxes as low as possible. Everybody does so,
rich or poor; and all do right, for nobody owes any public duty to pay more
than the law demands: taxes are enforced exactions, not voluntary
contributions. To demand more in the name of morals is mere cant.”
Problems
29.[LO2 PLANNING] Yong recently paid his accountant $10,000 for elaborate tax
planning strategies that exploit the timing strategy. Assuming this is an election year
and there could be a power shift in the White House and Congress, what is a
potential risk associated with Yong’s strategies?
Changes in the control of the White House and Congress may result in a
fundamental shift in tax policy. Tax rate changes are rather frequent as
