Chapter 4, Problem 22AP

For each of the following scenarios, indicate which of the four basic tax planning variables (entity, character, time period, jurisdiction) impacts after-tax value. Note that more than one variable may apply to any scenario; identify all that are relevant.

1. a. Aloha Corporation is considering building a new manufacturing facility in either State U or State P. State U has a 10 percent state income tax rate. State P has a 15 percent state income tax rate but offers a tax holiday for new business investment that would exempt up to $250,000 of Aloha’s earnings from state income tax for the first five years of operations in State P.
2. b. Mary wishes to help her nephew, Gill, pay his college tuition. Instead of giving Gill cash, Mary gives him bonds earning $10,000 annual interest income. Mary’s marginal tax rate is 35 percent, and Gill’s marginal tax rate is 12 percent.
3. c. Congress has recently enacted a decrease in corporate tax rates that will take effect at the beginning of next year. Grant Company, a cash basis taxpayer, is planning to pay expenses prior to year-end in order to maximize its tax savings in the current year.
4. d. Will has $50,000 to invest in the stock market. He is considering two alternatives. Stock A pays annual qualifying dividends of 6 percent. Stock B pays no dividends but is expected to increase in value at a rate of 5 percent per year. Will would hold either investment for a minimum of four years. Will’s marginal tax rate on ordinary income is 35 percent.