Principles of Taxation:
Advanced Strategies
Sally M. Jones
University of Virginia
Shelley Rhoades-Catanach
Villanova University
McGraw-Hill/Irwin
Copyright (c) 2003 by the McGraw-Hill Companies Inc
Slide 1-1
Principles of Taxation:
Advanced Strategies
Chapter 1
 Introduction

McGraw-Hill/Irwin
Copyright (c) 2003 by the McGraw-Hill Companies Inc
Slide 1-2
Decision Making Process
Time Value of Money
 A dollar earned in the future is not as
valuable as a dollar today
 Cash received or disbursed at different
times in the future must be discounted
 Net present value (NPV) represents
discounted value of all inflows and outflows
associated with project

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Slide 1-3
Present Value
1
PV ($ 1) =
n
+
(1 r )

Present value of a $1 after n periods
based upon a discount rate of r
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Slide 1-4
Present Value-Example

What is the present value of $ 1 received
in 5 years discounted at a 8% interest rate?
1
PV ($ 1) =
(1+1.08)5
Answer 46.32¢
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Slide 1-5
Present Value- Annuity

Present value of $ 1 received for n periods
at a discount rate of r
1
1
PV ($ 1over n periods)= 
n
r r(1+ r)
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Copyright (c) 2003 by the McGraw-Hill Companies Inc
Slide 1-6
Present Value- Annuity Example

Present value of an annuity of $ 1 to be
received for 10 years discounted at an 8%
rate
1
1
PV ($1) =

10
.08 .08(1.08)
Answer $ 6.71
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Slide 1-7
Present Value and Taxation
Timing of tax expenditures may be as
important as amount
 Tax deferred is tax reduced

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Slide 1-8
Tax Rates
For planning purposes only relevant rate is
rate at which the transaction will be taxed
 Marginal rate- rate next dollar of income
will be taxed
 May change
 Higher bracket due to more income
 Law change

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Slide 1-9
Factors Affecting Tax Planning
Which entity undertakes the transaction
 Over what period does transaction take
place
 In which jurisdiction does the transaction
take place
 What is the character of the income

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Slide 1-10
Tax Planning Principles
Taxes decrease if income earned by entity in
subject to a low rate
 Taxes decrease if payment can be deferred
to a later year
 Taxes decrease if income is generated in a
low rate jurisdiction
 Taxes decrease if income is taxed at a
preferential rate

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Slide 1-11
Choice of Entity
Different entities have different tax rates
 Pass through entities allow shifting income
to owner and one level of tax
 Partnerships
 S Corporation
 Limited Liability Companies

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Slide 1-12
Tax Deferral
Tax deferred is tax saved based upon time
value of money
 Techniques
 Accelerate Deductions
 Defer Income
 Installment sale

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Slide 1-13
Low Tax Jurisdictions
Foreign Country vs. United States
 Low tax vs. High tax states

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Slide 1-14
Income Character

Certain types of income are taxed at
preferential rates
 Interest from municipal bonds
 Long term capital gain income taxed to
individuals
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Slide 1-15
Other Factors
Carryforwards
 Net Operating Loss
 Capital Loss
 Credits
 Cost of Operations

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Slide 1-16
Restriction on Income Shifting

Legislative
 Sec. 482 prohibits shifts between related
entities that do no clearly reflect income
 Sec. 267 disallows losses on sales
between related entities
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Slide 1-17
Restrictions on Income Shifting

Judicial Prohibitions
 Lack of Business Purpose
 Substance over Form
 Step Transaction Doctrine
 Assignment of Income Doctrine
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