Troy is not a very astute investor.He has a knack for investing in losing stocks.In his latest investment move, he has realized a loss of about $40,000 (original basis of $50,000; current fair market value of $10,000)in High Tech, Inc.The good news is that unlike prior years, he actually has $45,000 of gains that he can use to offset the loss.Troy is considering either selling the High Tech, Inc.stock to his sister, Louise, or on the stock market.Which should he choose and why? Please explain why the IRS may treat the two transactions differently.
O'Reilly is a masterful lottery player.The megamillion jackpot is now up to $200 million.If O'Reilly wins the jackpot, he has a choice of receiving $200 million in five years or a smaller lump sum now.Advise O'Reilly on his choice under the following scenarios.Which option should he take and why? Use Exhibit 3.1.
a.O'Reilly's after-tax return is 10 percent.If he chooses the current lump-sum option, the lottery will pay him $130 million.
b.O'Reilly's after-tax return is 10 percent.His current tax rate will be 35 percent if he receives the lottery payment now.His expected tax rate in five years will be 40 percent.If he chooses the current lump-sum option, the lottery will pay him $100 million.
Sal, a calendar-year taxpayer, uses the cash-basis method of accounting for his sole proprietorship.In late December he performed $40,000 of consulting services for a client.Sal typically requires his clients to pay his bills immediately upon receipt.Assume that Sal's marginal tax rate is 32 percent this year and 37 percent next year and that he can earn an after-tax rate of return of 12 percent on his investments.Should Sal send his client the bill in December or January? Use Exhibit 3.1.(Round discount factor(s)to three decimal places.)
Lucky owns a maid service that cleans several local businesses nightly.Lucky, a high tax rate taxpayer, would like to shift some income to his son Rocco.Lucky tells all of his customers (who are always timely in their payments)to pay Rocco, and then Rocco will report 50 percent of the income as a collection fee.Lucky will report the remaining 50 percent.Will this shift the income from Lucky to Rocco? Why or why not? What doctrines influence your answer? Any suggestions for Lucky?