case study

Case Study

Tax Planning for Financial Investments

Editor:
Albert B. Ellentuck, Esq.
Of Counsel
King and Nordlinger, L.L.P.
Arlington, VA

Editor's note: This case study has been adapted from "Guide to Tax Planning for High Income Individuals," 1st Edition, by Anthony J. DeChellis, Douglas L. Weinbrenner, Catherine A. Roeder and Patrick L. Young, published by Practitioners Publishing Company, Fort Worth, Tex., 2000.

Facts: In March 2001, a new client, Henry Heartthrob, tells his tax adviser that he has been indulging rather heavily in the securities markets, buying and selling stocks and bonds with abandon over the last few years. Issues: What issues should Henry's tax adviser consider in servicing this client? The checklist below provides a start.

Procedures	"a" or N/A	Initials	Date

1. Has the client considered investment strategies in view of the capital gains rates?	–––	–––	–––
2. Have security holding periods been considered when planning for dispositions?	–––	–––	–––
3. Has the client considered after-tax return when choosing between taxable and tax-exempt investments?	–––	–––	–––
4. Is the client aware of the return potential and tax effects of investment in Treasury bills versus certificates of deposit or money market accounts?	–––	–––	–––
5. Has basis been properly calculated on the sale of a bond purchased at a premium or discount?	–––	–––	–––
6. If the client holds municipal bonds, has a bond swap been considered to recognize any unrealized losses?	–––	–––	–––
7. Is the client planning to purchase inflation-indexed Treasury notes? If so, has an analysis of the tax ramifications been done?	–––	–––	–––
8. Has the client sold a security at a loss and repurchased the identical security within 30 days?	–––	–––	–––
9. Has the client considered using specific identification on stock sales to minimize taxes?	–––	–––	–––
10. Is the client holding securities that do not have any value?	–––	–––	–––
11. Have the constructive sale rules been considered when planning for appreciated securities?	–––	–––	–––
12. Does the client qualify as a stock trader? If so, have the tax rules applicable to traders been considered?	–––	–––	–––
13. Is the client aware of his alternatives for computing basis on mutual fund share sales?	–––	–––	–––
14. If the client invests in mutual funds, was their tax efficiency considered when the funds were chosen?	–––	–––	–––
15. Is the client aware of the planning opportunities available for publicly traded options?	–––	–––	–––
16. Did the client receive any stock rights during the year? If so, have they been properly accounted for?	–––	–––	–––
17. If the client is carrying debt on his investments, have the investment interest rules been considered?	–––	–––	–––
18. Must the client allocate expenses to tax-exempt income and, if so, are methods other than the income-ratio method available?	–––	–––	–––
19. Has an annuity investment to defer tax on earnings been considered?	–––	–––	–––
20. If a client is planning to purchase a variable annuity, has a stock index fund been considered as an alternative?	–––	–––	–––
21. Has the client made loans to family members or other entities in which the taxpayer has a financial interest that carries either no interest or a below-market rate?	–––	–––	–––