5. Ms. O is the chief financial officer for Firm XYZ. The marketing department requested approval for an $80,000 cash expenditure. The request points out that the expenditure would be deductible. Therefore, the marketing department concludes that Ms. O should approve the expenditure because it would reduce XYZ’s tax cost. 6. Earlier in the year, Mrs. G, a business manager for Company RW, evaluated a prospective opportunity that could generate $20,000 additional taxable income. Mrs. G determined that the company’s marginal tax rate on this income would be 25 percent. Later in the year, a different manager evaluated another opportunity that could generate $100,000 additional taxable income. This manager referred to Mrs. G’s earlier evaluation and used the same 25 percent marginal rate in his analysis of after-tax cash flows. 7. Firm UW is about to enter into a venture that will generate taxable income for the next six to eight years. The director of tax has come up with an idea to restructure the venture in a way that will reduce tax costs by at least 5 percent. 8. DLT’s chief operating officer is negotiating the acquisition of a controlling interest in the stock of AA Inc. from Mr. and Mrs. A. The director of tax suggested that the acquisition be structured as a nontaxable transaction to Mr. and Mrs. A. The CEO rejected the suggestion by saying, “Since DLT is the purchaser, our negotiating team doesn’t really care if the structure of the acquisition saves taxes for the seller.” 9. Ms. S is the sole shareholder and chief executive officer of SMJ Corporation. Ms. S’s college roommate recently lost her job, is in financial difficulty, and has asked Ms. S for a loan. Instead of a loan, Ms. S offered the roommate a job with SMJ at a $35,000 annual salary.
