Tax Planning
Chapter 11
“Tax Awareness”
(the key)
Tax Planning
It’s legitimate
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“…. there is nothing sinister in so
arranging one’s affairs as to keep taxes
as low as possible. ……… nobody owes
any public duty to pay more than the
law demands: taxes are enforced
extractions, not voluntary contributions”
(Justice Learned Hand, Comm. vs.
Newman, 159 F.2d 848 [CA-2, 1947]).
Tax Planning
The objective
“optimization”
Tax Planning and
Professionalism
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Tax Avoidance
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Our objective
Legitimate
Legal
Tax Evasion
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Intent to defraud
Illegal
“Unrelated to a professional practice”
Tax Planning
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Open transaction
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Not yet completed
Practitioner maintains some degree of
control
Closed transaction
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“A done deal;” transaction completed
Practitioner can only clean up the mess
Tax Planning
An anomaly
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The costs are deductible
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By a business as a business related
expense
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By individuals on page 2, but is of limited use
and value due to page 2 deduction limitations
The benefits are non-taxable
This result is derived because the
tax/tax saving itself is not
deductible/taxable
Tax Planning - Rates
What we have to work with
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Proportional tax rate - XXXX
Regressive tax rate - XXXX
Progressive tax rate
Marginal tax rate – subject’s rate bracket
Nominal Average tax rate – actual tax
liability / taxable income
Effective tax rate – actual tax liability / total
income
Tax Planning
Fundamentals
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Avoid Income Recognition
Postpone Income Recognition
Change Tax Jurisdictions
Control the Classification of Income
Spread Income Among Related
Taxpayers
Tax Planning
Remember the Client
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Must tailor to meet Client’s
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Business or Profession
Financial situation
Personal matters or desires
Tax Planning
Beware of the Traps
Statutory Tax Traps
 §482 – “In any case of two or more
organizations, trades, or businesses ……
Owned or controlled by the same interests,
the Secretary may distribute, apportion, or
allocate gross income, deductions …… among
such organizations, trades, or businesses ……
is necessary to prevent evasion of taxes or
clearly reflect income …… .” (emphasis
mine)
Tax Planning
Beware of the Traps (cont’d)
Judicial Tax Traps
 Business purpose
 Concept of Substance over Form
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“What you do speaks louder than what you
say”
Step-transaction Doctrine
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“Collapsing” several transactions into
several steps of a single transaction”
Tax Planning – Examples????
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Loss property
Gain property
Fringe benefits
Frequent flyer miles
Charitable contributions (no strings)
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Gain property
Tax Planning
Examples (cont’d)
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Postpone/accelerate deductions
Types of investment property
Personal property taxes, charitable
contributions, interest, etc.
Need cash? Borrow v. other sources
Accrue salary
Salary, rent, interest, v. dividend –
beware of reasonableness
Tax Planning
Examples (cont’d)
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Passive losses – beware
IRAs
Accelerate income recognition – when
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Remember Banker’s Life – great initial
thinking (but poor follow through
Offshore
Tax Planning
Examples (cont’d)
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Employee v. Independent Contractor
Hobby v. Business
Dependants/Relatives
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Examples
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Michael Jordan
Owens Family
Ballaergent Ford
Others ???
Tax Planning
Summary
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Again, “Tax Awareness” is the key
But also remember the client
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Must tailor to client”s
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Business or profession
Financial situation
Personal matters/needs
Postgraduate Education
Expense Deduction
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Reg §1.162-5 Requirements – must be
incurred to
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Maintain or improve skills required in
profession or
Meet the express requirements of
employer, or
Required by employer as a condition to
retain present employment, status or
salary
Tax Planning
Reg. §1.162-5 Requirements
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Meaning - TP must currently be
employed, and is going to stay in that
employment
Tax Planning Reg. §1.162-5
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But, in spite of meeting previous,
requirements all is for naught if
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If the education is required to meet the
minimum requirements qualification in
the TP’s occupation, or
It will qualify the TP for a new trade or
business.
But Looking Further ……..
The Journal of Accountancy, June 2002, .
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Was in a business
Away for a temporary period
Intended to return within a reasonable
period
Intended to return to the same profession,
trade, or business.
Will be considered as having continued
his/her employment, thus, as having been
employed
Questions
?