Chapter 4, Problem 1QPD

a.

To determine

Determine if the given situation amounts to tax avoidance or tax evasion.

Explanation of Solution

Tax Avoidance Vs Tax Evasion: Tax avoidance refers to legalized means of reducing the tax liabilities by the taxpayers through tax planning, on the other hand, illegal means to avoid tax is known as tax evasion which is considered as offence and punishable under law.

In this case, since Mr. L is engaged in concealing his real income and understating it deliberately to avoid tax liability, this would be considered as tax evasion.

b.

To determine

Determine if the given situation amounts to tax avoidance or tax evasion.

Explanation of Solution

In this case, since Mr. P did not conceal any of his income rather encourages his son who is with lesser marginal tax rate than him, to invest $50,000, Mr. P is said to be engaged in tax avoidance.

c.

To determine

Determine if the given situation amounts to tax avoidance or tax evasion.

Explanation of Solution

In this case, since Mr. Q did not reveal truth in reporting his current years’ profit  in the previous year just to gain by the lower marginal tax, he is deliberately trying to cheat the authorities by wrong reporting of income and thus, would be considered as tax evasion.