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Taxes and Business Strategy : A Planning Approach

by ; ; ; ;
Edition:
2nd
ISBN13:

9780130253989

ISBN10:
0130253987
Format:
Hardcover
Pub. Date:
1/1/2002
Publisher(s):
PRENTICE HALL
List Price: $153.00

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Summary

This book takes an MBA style strategy perspective by considering the tax, accounting, and finance trade-offs involved in tax planning. Reflected in this revision are all changes in the tax code. Also covered: extensive analysis of technical tax rules applied to corporate mergers and acquisitions; explanation of accounting for income taxes; discussion on College Savings Plans (529s); up-to-date material on new tax rates on dividends and capital gains; and much more. For individuals furthering their personal or formal education of tax strategy, investment banking, corporate finance, strategy consulting, money management, or venture capital.

Table of Contents

Introduction to Tax Strategy
1(18)
Why Do Tax Rules Influence Investment Decisions?
2(1)
Structure and Themes of This Text
2(6)
A planning approach
3(1)
Taxing authority as investment partner
3(2)
The importance of a contractual perspective
5(1)
Implicit taxes and tax clienteles
6(1)
Tax planning as a tax-favored activity
6(1)
Why study tax planning?
7(1)
Topics Covered in This Text
8(2)
Intended Audience for This Text
10(9)
Summary of Key Points
12(2)
Overview of Calculating Income Tax Liability
14(2)
Discussion Questions
16(1)
Exercises
16(1)
Tax Planning Problems
17(1)
References and Additional Readings
18(1)
Tax Law Fundamentals
19(22)
Types of Tax Planning
21(4)
Converting income from one type to another
21(2)
Shifting income from one pocket to another
23(1)
Shifting income from one time period to another
23(2)
Restrictions on Taxpayer Behavior
25(4)
Constructive-receipt doctrine
25(1)
Substance-over-form and business-purpose doctrines
25(3)
Related-party versus arm's-length contracts
28(1)
Assignment-of-income doctrine
28(1)
The Legislative Process and Sources of Tax Information
29(12)
Primary authorities
29(1)
The legislative process
30(1)
Regulations and revenue rulings that result from the passage of a tax act
31(1)
The role of judicial decisions
32(1)
Secondary authorities
32(1)
Summary of Key Points
33(1)
Sources of Information on Tax Legislation
34(1)
Discussion Questions
35(1)
Exercises
36(1)
Tax Planning Problems
37(2)
References and Additional Readings
39(2)
Returns to Alternative Savings Vehicles
41(21)
Intertemporally Constant Tax Rates
42(9)
Review of compound interest
44(1)
Investments in savings vehicles I and II
45(2)
Hybrid savings vehicles
47(1)
Differences in after-tax accumulations in savings vehicles I and II as a function of pretax rates of return
47(1)
Investments in savings vehicle III
47(1)
Comparison of savings vehicles II and III
48(1)
Investments in savings vehicle IV
49(1)
Investments in savings vehicle V
49(1)
Investments in savings vehicle VI
50(1)
Dominance relations and empirical anomalies
50(1)
Changes in Tax Rates over Time
51(1)
More on Pension Plans
52(10)
Traditional deductible IRAs
53(1)
Roth IRAs
53(1)
Nondeductible IRAs
53(1)
Comparison of the deductible and Roth IRAs: New contributions
53(2)
Comparison of the deductible and Roth IRAs: The rollover decision
55(1)
Summary of Key Points
56(1)
Discussion Questions
57(1)
Exercises
58(2)
Tax Planning Problems
60(1)
Reference
61(1)
Choosing the Optimal Organizational Form
62(29)
Organizational Forms for Producing Goods and Services
64(4)
After-tax returns to pass-through and non-pass-through forms of organization
66(2)
The Choice of Partnership or Corporate Form in Special Cases
68(1)
Changing Preferences for Organizational Forms Induced by Tax-Rule Changes
68(11)
The required before-tax rates of return on corporate and partnership activities
69(2)
The required rate of return on stocks in the presence of dividends
71(1)
The effective annualized tax rate on shares
72(1)
Required before-tax rate of return: Corporations versus partnerships
72(2)
Pre-1981 Economic Recovery Tax Act (ERTA 1981)
74(1)
Post-1981 Economic Recovery Tax Act (1981--1986)
74(1)
Post-1986 Tax Reform Act (1987, 1988--1990)
74(1)
Post-1999 Revenue Reconciliation Tax Acts (1991--1996)
75(1)
1997 to the present
75(1)
Cross-sectional variation in corporate, personal and, shareholder-level tax rates
76(1)
Net operating losses and the corporate tax rate
76(1)
Further complications in determining the shareholder-level tax rate, ts
77(2)
Progressive personal income tax rates, tp and tcg
79(1)
Other Organizational Forms for Organizing Production Activities
79(5)
Hybrid corporate forms
79(4)
Other noncorporate organizational forms
83(1)
Nontax Advantages of Operating in Corporate Form
84(7)
Summary of Key Points
85(1)
Discussion Questions
86(1)
Exercises
87(1)
Tax Planning Problems
88(2)
References and Additional Readings
90(1)
Implict Tax and Clienteles, Arbitrage, Restrictions and, Frictions
91(36)
Tax-Favored Status and Implicit Taxes
93(5)
The Implicit Tax Rate, the Explicit Tax Rate and, the Total Tax Rate
98(2)
Computing the implicit tax
98(1)
Total tax rates in a competitive market
99(1)
The Importance of Adjusting for Risk Differences
100(3)
Clienteles
103(2)
Evidence on the existence of implicit taxes and clienteles
104(1)
Implicit Taxes and Corporate Tax Burdens
105(2)
Tax Arbitrage
107(1)
Organizational-Form Arbitrage
107(8)
Immediate tax rebates when taxable income is negative
107(1)
No tax rebates on negative taxable income
108(1)
Restrictions on organizational-form arbitrage
109(1)
Full taxation with deferral and organizational-form arbitrage
110(1)
The effects of frictions on organizational-form arbitrage
111(1)
Bankruptcy rules and organizational-form arbitrage
112(1)
Buying and selling implicitly taxed assets to effect organizational-form arbitrage
113(2)
Clientele-Based Arbitrage
115(12)
Clientele-based arbitrage with investments in tax-favored assets other than tax-exempt bonds
116(1)
Market equilibrium with tax-exempt entities
117(1)
Summary of Key Points
117(3)
Adjusting for Risk Using the Capital Asset Pricing Model
120(1)
Discussion Questions
120(1)
Exercises
121(2)
Tax Planning Problems
123(2)
References and Additional Readings
125(2)
Nontax Costs of Tax Planning
127(28)
Symmetric Uncertainty, Progressive Tax Rates and, Risk Taking
129(4)
R&D and O&G activities
131(2)
Progressive tax rates and hedging
133(1)
Tax Planning in the Presence of Risk-Sharing and Hidden-Action Considerations
133(5)
Contracting in capital markets
133(2)
Contracting in labor markets
135(1)
Conflicts between risk sharing and tax minimization
136(1)
Conflicts between incentive contracting and tax minimization
137(1)
Tax Planning in the Presence of Hidden-Information Considerations
138(1)
Tax Planning and Organizational Design
139(2)
Conflicts Between Financial Reporting and Tax Planning
141(14)
Income Shifting Across Time
142(1)
LIFO/FIFO studies
143(1)
LIFO adoption
143(1)
LIFO liquidation
143(1)
LIFO abandonment
144(1)
Regulatory costs
144(1)
Asset sales and divestitures
145(1)
Dollar estimates of firms' willingness to forego tax savings
145(1)
Political cost impediments to tax planning
146(1)
Other book-tax conformity costs
146(1)
Other informational cost impediments to tax planning
147(1)
Summary of Key Points
147(2)
Discussion Questions
149(1)
Exercises
150(2)
Tax Planning Problems
152(1)
References and Additional Readings
153(2)
The Importance of Marginal Tax Rates and Dynamic Tax-Planning Considerations
155(25)
Marginal Tax Rate: Definitional Issues
157(6)
Foreign, state and, local corporate taxes
159(1)
Individual taxpayers' marginal tax rate
160(1)
Average and effective tax rates
161(1)
Problems with effective tax rates
161(2)
Tax Planning for Low Marginal Tax Rate Firms
163(1)
Adaptability of Tax Plans
164(3)
Transaction costs and tax clienteles
165(1)
Adaptability in investment and financing decisions
166(1)
Reversibility of Tax Plans
167(1)
Ability to Insure Against Adverse Changes in Tax Status
168(4)
Tax Planning When a Taxpayer's Marginal Tax Rate Is Strategy-Dependent
172(8)
Summary of Key Points
173(2)
Medical Savings Plans and Dynamic Tax Planning
175(1)
Discussion Questions
175(1)
Exercises
176(2)
Tax Planning Problems
178(1)
References and Additional Readings
179(1)
Compensation Planning
180(31)
Salary Versus Deferred Compensation
181(4)
Employer and employee tax rates both expected to fall
184(1)
Salary Versus Fringe Benefits
185(3)
Analysis for taxable employer
187(1)
Analysis for tax-exempt employer
187(1)
Compensatory Loans
188(1)
Cash Bonus Plans
189(1)
Stock-Based Compensation Components
190(21)
Tax issues relating to incentive stock options and nonqualified stock options
191(4)
Evidence on the role of taxes in the choice of ISO
195(1)
Disqualifying dispositions of ISOs
195(2)
The role of taxes in the NQO exercise decision
197(3)
Financial accounting and tax comparison of stock appreciation rights and stock options
200(2)
Compensation in venture-capital-backed start-ups
202(1)
Other influences of taxes on compensation structure
202(1)
Concluding remarks
203(1)
Summary of Key Points
204(1)
Discussion Questions
205(1)
Exercises
206(2)
Tax Planning Problems
208(2)
References and Additional Readings
210(1)
Pension and Retirement Planning
211(29)
Types of Pension Plans
212(2)
Comparison of Salary and Pension Compensation
214(3)
Rates of return on investments in and out of pension accounts
216(1)
Antidiscrimination rules
216(1)
Deferred Compensation Versus Pension
217(1)
The Stocks-Versus-Bonds Puzzle
218(4)
Does It Pay to Maintain an Overfunded Pension Plan?
222(4)
Advantages and disadvantages
222(3)
Empirical evidence on determinants of defined benefit plan pension funding
225(1)
Funding Post-Employment Health Care Benefits
226(4)
The sweetened pension benefit approach
227(1)
The pay-as-you-go approach
228(1)
Other factors relevant to the funding decision
229(1)
Employee Stock Ownership Programs
230(10)
Summary of Key Points
232(2)
Excise Tax Complications
234(1)
Discussion Questions
235(1)
Exercises
235(1)
Tax Planning Problems
236(3)
References and Additional Readings
239(1)
Multinational Tax Planning: Introduction and Investment Decisions
240(31)
Overview of Multinational Taxation
242(10)
Avoiding worldwide taxation
243(1)
Operating as a branch versus a foreign subsidiary
243(3)
Foreign tax credits
246(3)
Subpart F income and controlled foreign corporations (CFCs)
249(2)
Inversion transactions
251(1)
How Taxes Affect the Location and Structure of Investments
252(6)
Large implicit taxes and foreign investment incentives
256(2)
The Decision to Repatriate or Reinvest
258(13)
Subpart F income and controlled foreign corporations
260(1)
Investment and repatriation policy when the foreign tax rate exceeds the domestic tax rate
261(1)
Summary of Key Points
262(1)
Discussion Questions
262(1)
Exercises
263(1)
Tax Planning Problems
264(5)
References and Additional Readings
269(2)
Multinational Tax Planning: Foreign Tax Credit Limitations and Income Shifting
271(20)
Foreign Tax Credit Limitations and Incentives
272(7)
Example of excess FTC limitation
272(2)
Examle of excess FTC credit
274(2)
Example of FTC with multiple subsidiaries
276(1)
Country-by-country FTC limitations
277(1)
Separate basket limitations
277(2)
FTC limitations and the capital structure of foreign subsidiaries
279(1)
Shifting Income Across Jurisdictions
279(4)
Transfer pricing
279(1)
Source of income rules
280(3)
Loss importation transactions
283(1)
U.S. Tax Treatment of Foreign Investors
283(8)
Summary of Key Points
284(1)
Discussion Questions
285(1)
Exercises
286(1)
Tax Planning Problems
287(2)
References and Additional Readings
289(2)
Corporations: Formation, Operation, Capital Structure and, Liquidation
291(26)
Corporate Formation
292(2)
Taxation of Corporate Operations
294(3)
Book-Tax Differences: Taxable Income Versus GAAP Income
294(1)
Net operating losses
295(1)
Gains and lossesand tax basis
295(1)
Capital gains and losses
296(1)
Section 1231 assets
296(1)
Dividends-received deduction
297(1)
Consolidated tax returns
297(1)
Possible Tax Benefits of Leverage in Firms' Capital Structures
297(3)
Theory of the tax benefits of leverage
298(2)
Empirical work on the tax benefits of leverage
300(1)
Debt-Equity Hybrids
300(6)
``Plain-vanilla'' preferred stock
301(1)
Trust preferred stock
301(3)
Zero-coupon bonds
304(2)
Taxation of Distributions and Share Repurchases
306(5)
The concept of earnings and profits
307(2)
Special kinds of distributions
309(1)
Taxation of share repurchases
310(1)
Tax Planning Using the Tax Rules for Distributions and Share Repurchases
311(1)
Taxation of Liquidations
312(5)
Parent-Subsidiary Liquidations
312(1)
Summary of Key Points
312(1)
Discussion Questions
313(1)
Exercises
314(1)
References and Additional Readings
315(2)
Introduction to Mergers, Acquisitions and, Divestitures
317(17)
Overview of Issues
318(2)
Reasons for mergers, acquisitions and, divestitures
318(1)
Types of mergers, acquisitions and, divestitures
319(1)
Major Tax Issues Associated With Mergers, Acquisitions and, Divestitures
320(3)
Shareholder tax liabilities
320(1)
Effect on tax attributes
321(1)
Target corporate-level tax effect of the merger, acquisition, or divestiture
322(1)
Change in the tax basis of the target or divested subsidiary assets
322(1)
Effect of leverage on mergers and acquisitions
323(1)
Nontax Issues in Mergers, Acquisitions and, Divestitures
323(1)
Five Basic Methods to Acquire a Freestanding C Corporation
324(1)
Four Methods to Divest a Subsidiary or Line of Business
325(2)
Tax Deductibility of Goodwill and Other Intangible Assets Under Section 197
327(7)
Summary of Key Points
330(2)
Discussion Questions
332(1)
References and Additional Readings
332(2)
Taxable Acquisitions of Freestanding C Corporations
334(27)
Tax Consequences of Alternative Forms of Corporate Acquisitions
335(10)
Taxable asset acquisition without a complete liquidation of the target
337(2)
Sale of the target firm's assets followed by a liquidation
339(1)
Purchase of the target's stock followed by a section Election
340(3)
Purchase of the target's stock without a section 338 election
343(2)
Comparison of Taxable Acquisition Structures
345(6)
Analysis of acquiring firm indifference price
349(2)
Tax Deferral through Installment Sale Tax Treatment
351(1)
Practical Issues Associated with Structuring and Pricing an Acquisition
351(10)
Estimating the net tax basis of a target's assets
352(6)
Summary of Key Points
358(1)
Discussion Questions
358(1)
Tax Planning Problems
359(1)
References and Additional Readings
360(1)
Taxable Acquisitions of S Corporations
361(27)
Tax Consequences of Taxable S Corporation Acquisition Structures
362(16)
Taxable asset acquisition
364(4)
Taxable stock acquisition with section 338(h)(10) election
368(2)
Taxable stock acquisition without a section 338(h)(10) election
370(1)
Which structure is optimal in the sale of an S corporation?
371(2)
Advanced analysis: S corporation acquisition
373(5)
Comparison of the Sale of Similar S and C Corporations
378(10)
Tax consequences for T1 and T2 shareholders in a taxable stock sale
379(1)
Tax consequences for A corporation
379(1)
Indifference point for T1's shareholders (C corporation) with an asset sale structure
379(1)
Indifferent price for T2's shareholders (S corporation) with an asset sale structure
379(3)
Will the acquirer pay T1's (C corporation) indifference price in a taxable asset sale?
382(1)
Will the acquirer pay T2's (S corporation) indifference price in a taxable asset sale (stock sale with a Section 338(h)(10) election)?
382(1)
Valuation consequences and issues
383(1)
Installment sales tax treatment
384(1)
Summary of Key Points
384(1)
Discussion Questions
385(1)
Tax Planning Problems
385(2)
References and Additional Readings
387(1)
Tax-Free Acquisitions of Freestanding C Corporations
388(41)
Basic Types of Tax-Free Reorganizations
389(2)
General requirements for tax-free treatment under Section 368
389(2)
Section 368 ``A'' Reorganization: Statutory Merger
391(4)
Requirements to qualify for tax-free treatment under Section 368(a)(1)(A)
391(1)
Tax consequences of a Section 368 ``A''
391(3)
Nontax issues associated with the Section 368 ``A'' structure
394(1)
Triangular mergers
395(1)
Section 368 ``B'' Reorganization: Stock for Stock Acquisition
395(3)
Requirements to qualify for tax-free treatment under Section 368(a)(1)(B)
395(2)
Tax consequences of a Section 368 ``B''
397(1)
Nontax issues associated with the Section 368 ``B'' structure
398(1)
Section 368 ``C'' Reorganization: Stock for Assets Acquisition
398(2)
Requirements to qualify for tax-free treatment under Section 368(a)(1)(C)
399(1)
Tax consequences of a Section 368``C''
400(1)
Tax-Free Reorganizations Under Section 351
400(5)
Requirements for tax-free treatment under Section 351
401(1)
Tax consequences of a Section 351 merger
401(3)
Comparison of tax-free acquisition structures
404(1)
Limitations on Target Firm Tax Attributes
405(4)
Limitations on acquiring firm tax attributes
408(1)
Taking advantage of expiring NOLs: Sale/leaseback
409(1)
Quantifying Pricing Differences Between Taxable and Tax-Free Acquisitions of Freestanding C Corporations
409(10)
Additional complexities
414(2)
Implications for corporate valuation
416(2)
Trends in acquisition volume and structure across time
418(1)
Comparison of Taxable and Tax-Free Acquisitions of Freestanding C Corporations
419(10)
Advanced techniques to provide diversification and tax-free treatment
422(1)
Summary of Key Points
423(1)
Discussion Questions
423(1)
Tax Planning Problems
424(4)
References and Additional Readings
428(1)
Tax Planning for Divestitures
429(34)
Subsidiary Sales
430(16)
Tax-free subsidiary sales
430(2)
Taxable subsidiary sales
432(6)
Comparison of taxable acquisition structures
438(5)
Additional complexities: Subsidiary sale
443(2)
Difference between subsidiary sales and sales of freestanding C corporations
445(1)
Valuation effects
446(1)
Tax-Free Divestiture Methods
446(7)
Equity carve-outs
446(2)
Tax-free spin-offs
448(4)
Other variants of the spin-off: Split-ups, split-offs and, tracking stock
452(1)
Factors that influence divestiture method choice
453(1)
Advanced Divestiture Techniques
453(10)
Tax-free subsidiary sale under Section 351 followed by secured borrowing
453(2)
Derivative-based divestiture techniques
455(2)
Summary of Key Points
457(1)
Discussion Questions
458(1)
Tax Planning Problems
458(4)
References and Additional Readings
462(1)
Estate and Gift Tax Planning
463(28)
Fundamentals of Estate and Gift Taxation
465(6)
Specifics of the gift tax
467(1)
Specifics of the estate tax
468(3)
Generation-skipping transfer tax
471(1)
Estate and Gift Planning Strategies
471(7)
Making full use of the annual gift tax exclusion
471(1)
Gifting in excess of the annual exclusion
472(1)
Using each spouse's unified credit and lower brackets
473(1)
Using the marriage deduction to defer estate taxation
473(1)
Keeping life insurance out of the gross estate
474(1)
Family limited partnerships
475(1)
Transfer of knowledge, information and, services
476(1)
Charitable remainder trusts
476(1)
Grantor retained trusts
477(1)
Monetizing Appreciated Assets Without Triggering Taxation: A Case Study
478(4)
Taxation of short sales
479(1)
The strategy
480(1)
Congress takes action
481(1)
Avoiding the constructive sale rules
481(1)
The Tax Subsidy to Charitable Giving
482(1)
A Model of the Trade-Offs Between Gifting Now Versus by Bequest
483(2)
The trade-offs between gifting and losing the step-up in basis on bequests
484(1)
International Aspects of Estate and Gift Taxation
485(6)
Summary of Key Points
486(1)
Discussion Questions
487(1)
Exercises
487(1)
Tax Planning Problems
488(1)
References and Additional Readings
489(2)
Glossary 491(16)
Index 507


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