Chapter 3

Question 1

tax costs are _______ when tax rates are high and ______ when tax rates are lower

Answer 1

higher; lower

Question 2

two basic timing strategies when tax rates are constant

Answer 2

1. defer recognizing taxable income to future period
2. accelerate deductions to current period

Question 3

2 limitations to timing

Answer 3

1. inability to defer income/deductions
2. a cash basis taxpayer must recognize income for taxes when it is actually or constructively received

Question 4

3 tests for constructively received

Answer 4

1. amount is known or estimable
2. taxpayer is legally entitled to amount
3. taxpayer controls the timing of receipt

Question 5

income shifting

Answer 5

taxes advantage of varying tax rates across taxpayers and taxing jurisdictions

Question 6

related parties

Answer 6

shifting from a high taxed relative to a lower taxed relative (ex: parent to child)

Question 7

Business Purpose doctrine

Answer 7

allows the IRS to challenge and disallow business expenses for transactions with no underlying business motivation

Question 8

Step-Transaction Doctrine

Answer 8

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

Question 9

Economic Substance Doctrine

Answer 9

a transaction must change taxpayer’s economic position and have substantial purpose in order to receive tax benefits

Question 10

tax avoidance

Answer 10

legally arranging your affairs to pay the minimum amount of tax

Question 11

tax evasion

Answer 11

illegally avoiding tax on income or taking deductions that are not authorized

Question 12

tax gap

Answer 12

difference between taxes owed and taxes collected