A taxpayer is considering two mutually exclusive alternatives. Alternative A is to hire a tax accountant at a cost of $ 20,000 to research the tax law on a tax avoidance plan. If successful, the plan would save the taxpayer $ 21,000 in taxes. The probability of success is estimated to be 75%. Alternative B is to hire a marketing firm at a cost of $ 18,000, whose task would be to develop a marketing plan for the taxpayer’s product. If successful, the plan would reduce other advertising costs by $ 25,000 without affecting sales revenue. The probability of success is estimated at 80%. Which alternative should the taxpayer choose if he or she faces a tax rate of 15%? Of 35%? Comment on your results. Is tax planning a tax favored activity? Is so, for whom?
Answer to relevant QuestionsA taxpayer works at a corporation nearing the end of its fiscal year. The company has had a very successful (profitable) year and has decided to award the employee a cash bonus of 20% of annual salary (a bonus of $ 30,000). ...Provide an example of a tax rule designed to motivate a socially desirable activity that also motivates transactions that reduce a taxpayer’s tax liabilities but serve no social purpose. How do such judicial doctrines as the economic substance, substance over form, and business purpose doctrines affect taxpayer behavior? Is it socially beneficial to have such doctrines? A taxpayer owns and operates an art gallery with a large inventory of paintings held for sale to customers. She took one of the paintings home and hung it in her dining room. A week later, a dinner guest liked the painting ...Identify three tax characteristics that differ among alternative savings vehicles.
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