Question

Lewis Inc. took great care to structure an income-generating transaction so that the income and cash flow shifted to Cole Inc. Presuming that Lewis Inc. makes rational decisions, which of the following statements (if any) is false?

A.) Lewis and Cole must be related parties that share a mutual economic interest.

B.) Lewis's marginal tax rate is lower than Cole's marginal tax rate.

C.) The income shift should increase the NPV of the transaction.

D.) None of the above is false.

Answer 1

The false statement is B.) Lewis's marginal tax rate is lower than Cole's marginal tax rate.

Since Lewis is a rational decision maker and it has shifted the income to Cole Inc., it must have been done to reduce tax liability. The income shift would increase NPV, lower taxes and related parties are correct.

Hence, the false statement is B.) Lewis's marginal tax rate is lower than Cole's marginal tax rate.

Lewis's marginal tax rate must have been higher that's why the income was shifted.