32787597
Description
Flashcards by Jamie Plym, updated more than 1 year ago
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Created by Jamie Plym
over 3 years ago
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| Question | Answer |
| After-tax rate of return | a taxpayer’s before-tax rate of return on an investment minus the taxes paid on the income from the investment. The formula for an after-tax rate of return that is taxed annually is the before-tax rate of return × (1 − marginal tax rate) [i.e., r = R × (1 − t)]. A taxpayer’s after-tax rate of return on an investment held for more than one tax period is r = (FV/I)1/n − 1, where r is the after-tax rate of return, FV is the after-tax future value of the investment, I is the original investment amount, and n is the number of periods the investment is held. |
| Arm’s-length transactions | transactions among unrelated taxpayers, where each transacting party negotiates for his or her own benefit. |
| Assignment of income doctrine | the judicial doctrine holding that earned income is taxed to the taxpayer providing the service, and that income from property is taxed to the individual who owns the property when the income accrues. |
| Before-tax rate of return | a taxpayer’s rate of return on an investment before paying taxes on the income from the investment. |
| Business purpose doctrine | the judicial doctrine that allows the IRS to challenge and disallow business expenses for transactions with no underlying business motivation. |
| Constructive receipt doctrine | the judicial doctrine that provides that a taxpayer must recognize income when it is actually or constructively received. Constructive receipt is deemed to have occurred if the income has been credited to the taxpayer’s account or if the income is unconditionally available to the taxpayer, the taxpayer is aware of the income’s availability, and there are no restrictions on the taxpayer’s control over the income. |
| Discount factor | the factor based on the taxpayer’s rate of return that is used to determine the present value of future cash inflows (e.g., tax savings) and outflows (taxes paid). |
| Economic substance doctrine | judicially based doctrine that requires transactions to meaningfully change a taxpayer’s economic position and have a substantial purpose (apart from a federal income tax purpose) in order for a taxpayer to obtain tax benefits. |
| Implicit taxes | indirect taxes that result from a tax advantage the government grants to certain transactions to satisfy social, economic, or other objectives. They are defined as the reduced before-tax return that a tax-favored asset produces because of its tax-advantaged status. |
| Present value | the concept that $1 today is worth more than $1 in the future. For example, assuming an investor can earn a 5 percent after-tax return, $1 invested today should be worth $1.05 in one year. Hence, $1 today is equivalent to $1.05 in one year. |
| Related-party transaction | financial activities among family members, among owners and their businesses, or among businesses owned by the same owners. |
| Step-transaction doctrine | judicial doctrine that allows the IRS to collapse a series of related transactions into one transaction to determine the tax consequences of the transaction. |
| Substance-over-form doctrine | judicial doctrine that allows the IRS to consider the transaction’s substance regardless of its form and, where appropriate, reclassify the transaction according to its substance. |
| Tax avoidance | the legal act of arranging one’s transactions or affairs to reduce taxes paid. |
| Tax evasion | the willful attempt to defraud the government (i.e., by not paying taxes legally owed). Tax evasion falls outside the confines of legal tax avoidance. |
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