For each of the following situations, discuss whether the individual is engaging in tax avoidance or tax evasion. a. Mrs. Q sold an asset in January xx20. Her $12,000 profit on the sale is ordinary income. After preparing her income tax return for the prior year, Mrs. Q realized that her marginal tax rate in xx19 was 24 percent and her marginal rate for xx20 year will be 37 percent. Mrs. Q decides to report the profit on her xx19 return to take advantage of the lower tax rate.
b. Mr. L performed minor construction work for a number of people who paid him in cash. Because Mr. L knows that there is almost no chance that the IRS could learn of these payments, he reports only half the payments as income on his federal tax return.
c. Mr. P, who is in the 35 percent tax bracket, recently had the opportunity to invest $50,000 in a new business that should yield an annual return of at least 17 percent. Rather than invest himself, Mr. P gave $50,000 cash to his son, who then made the investment. The son's marginal tax rate is only 15 percent.