Question 1

Opportunity cost refers to the decrease in NPV from a deferral of the receipt of before-tax cash flows.

Accepted Answer

A) True 
 B)False

Question 2

Elton Company plans to build a new facility to manufacture backpacks.Elton sells its backpacks across the country for $300 per pack.It could locate the plan in state A,which levies a 5 percent tax on business income.The estimated manufacturing cost per pack in state A would be $120.Alternatively,Elton could locate the plan in state B,which levies a 3 percent tax on business income.The estimated manufacturing cost in state B is $126 per pack.In which state should Elton locate its plant? Provide calculations to support your conclusion.

Accepted Answer

Before-tax profit per pack in state A is

Question 3

Andrea Mitchell can shift income to her daughter,Lynn,by endorsing a check for $10,000 received for a client over to Lynn.

Accepted Answer

A) True 
 B)False

Question 4

NWR Inc.is structuring a transaction that will require a $200,000 deductible cash expenditure.Which of the following structures is the most effective in terms of the time period variable?

Accepted Answer

A) NWR will pay the cash and report the deduction in 20Y1. 
B) NWR will pay the cash and report the deduction in 20Y2. 
C) NWR will pay the cash in 20Y2 and report the deduction in 20Y1. 
D) NWR will pay the cash in 20Y1 and report the deduction in 20Y2. 
A) NWR will pay the cash and report the deduction in 20Y1. 
B) NWR will pay the cash and report the deduction in 20Y2. 
C) NWR will pay the cash in 20Y2 and report the deduction in 20Y1. 
D) NWR will pay the cash in 20Y1 and report the deduction in 20Y2.

Question 5

Mrs.Day structures a transaction to shift income from her sole proprietorship to her grandson's business.This tax planning strategy may be taking advantage of the:

Accepted Answer

A) Entity variable 
B) Time period variable 
C) Jurisdiction variable 
D) Character variable 
A) Entity variable 
B) Time period variable 
C) Jurisdiction variable 
D) Character variable

Question 6

Gregly Company,which has a 21% marginal tax rate,plans to make an investment that should generate $300,000 annual cash flow/ordinary income.Instead of making the investment directly,Gregly could form a new taxable entity (L'il Greg)to make the investment.L'il Greg's marginal tax rate on the investment income would be only 13%.However,L'il Greg would have to incur a $26,500 annual nondeductible expense associated with the investment that Gregly would not incur.
A.Should Gregly make the investment directly or make it through L'il Greg to maximize after-tax cash flow?
B.Would your answer change if L'il Greg could deduct its $26,500 additional expense?

Accepted Answer

A.Gregly's annual after-tax cash flow if

Question 7

The substance over form doctrine allows the IRS to look through the legal formalities of a transaction to determine its true economic nature.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following entities is not a taxable entity for federal income tax purposes?

Accepted Answer

A) Mr.Bob Clark,a U.S.citizen and resident of West Virginia 
B) PTS Limited,an Arizona partnership 
C) Confad Inc.,an Oklahoma corporation listed on Nasdaq 
D) All of the above are taxable entities. 
A) Mr.Bob Clark,a U.S.citizen and resident of West Virginia 
B) PTS Limited,an Arizona partnership 
C) Confad Inc.,an Oklahoma corporation listed on Nasdaq 
D) All of the above are taxable entities.

Question 9

Mrs.Day structures a transaction to convert income from ordinary income to capital gain.This tax planning strategy may be taking advantage of the:

Accepted Answer

A) Entity variable 
B) Time period variable 
C) Jurisdiction variable 
D) Character variable 
A) Entity variable 
B) Time period variable 
C) Jurisdiction variable 
D) Character variable

Question 10

Corporations,LLCs,and partnerships are all taxable entities.

Accepted Answer

A) True 
 B)False

Question 11

Mr.Cox has the choice between two transactions.Transaction A will generate $500,000 taxable cash flow in the current year (year 0).Transaction B will generate $460,000 cash flow in the current year,but Mr.Cox will not be required to report $460,000 income until next year (year 1).Mr.Cox has a 40% marginal tax rate and uses a 10% discount rate to compute NPV.Use Appendix A of your textbook provided to determine which of the following statements is true?

Accepted Answer

A) Mr.Cox should choose transaction A because it generates more before-tax cash flow. 
B) Mr.Cox should choose transaction A because its NPV exceeds transaction B's NPV. 
C) Mr.Cox should choose transaction B because the tax cost is deferred one year. 
D) Mr.Cox should choose transaction B because its NPV exceeds transaction A's NPV. 
A) Mr.Cox should choose transaction A because it generates more before-tax cash flow. 
B) Mr.Cox should choose transaction A because its NPV exceeds transaction B's NPV. 
C) Mr.Cox should choose transaction B because the tax cost is deferred one year. 
D) Mr.Cox should choose transaction B because its NPV exceeds transaction A's NPV.

Question 12

The time period variable is based on the time value of money.

Accepted Answer

A) True 
 B)False

Question 13

The business purpose doctrine allows the IRS to collapse a series of intermediate transactions into a single transaction to determine the tax consequences of the arrangement in its entirety.

Accepted Answer

A) True 
 B)False

Question 14

Both the individual and the corporate federal income tax rates are progressive.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements about the jurisdiction variable is true?

Accepted Answer

A) Most businesses are subject to the taxing jurisdiction of more than one government. 
B) For federal purposes,state income taxes are deductible in the computation of taxable income. 
C) Businesses can often minimize total tax burden by conducting business in jurisdictions with favorable tax climates. 
D) All of the above statements are true. 
A) Most businesses are subject to the taxing jurisdiction of more than one government. 
B) For federal purposes,state income taxes are deductible in the computation of taxable income. 
C) Businesses can often minimize total tax burden by conducting business in jurisdictions with favorable tax climates. 
D) All of the above statements are true.

Question 16

Which of the following statements about the time period variable is false?

Accepted Answer

A) If Congress replaced the current progressive income tax rates with a proportionate rate applying to all taxpayers,the time period variable would no longer be a factor in tax planning. 
B) The time period variable becomes more important as the taxpayer's discount rate for computing NPV increases. 
C) Tax planning strategies based on the time period variable must involve at least two different taxable years. 
D) Tax planning strategies based on the time period variable reflect the time value of money. 
A) If Congress replaced the current progressive income tax rates with a proportionate rate applying to all taxpayers,the time period variable would no longer be a factor in tax planning. 
B) The time period variable becomes more important as the taxpayer's discount rate for computing NPV increases. 
C) Tax planning strategies based on the time period variable must involve at least two different taxable years. 
D) Tax planning strategies based on the time period variable reflect the time value of money.

Question 17

Mrs.James plans to invest in one of two investment alternatives having the same risk.Investment 1 has a before-tax return of 10% and the income from investment 1 would be taxed at Mrs.James' 35% regular tax rate.Investment 2 has a before-tax return of 8% and the income from investment 2 would be taxed at a 15% preferential rate.Which of the following statements regarding these investment choices is false?

Accepted Answer

A) The after-tax rate of return on investment 1 is 6.5%. 
B) The after-tax rate of return on investment 2 is 6.8%. 
C) Investment 2 bears implicit tax relative to investment 1. 
D) Mrs.James should choose investment 1. 
A) The after-tax rate of return on investment 1 is 6.5%. 
B) The after-tax rate of return on investment 2 is 6.8%. 
C) Investment 2 bears implicit tax relative to investment 1. 
D) Mrs.James should choose investment 1.

Question 18

A taxpayer may choose to accept a reduced market rate of return on an investment to take advantage of a tax preference associated with the investment.In such case,the taxpayer will pay a/an:

Accepted Answer

A) Excise tax 
B) Explicit tax 
C) Implicit tax 
D) Transaction tax 
A) Excise tax 
B) Explicit tax 
C) Implicit tax 
D) Transaction tax

Question 19

Mr.Dole needed to sell appreciated stock out of his investment portfolio to generate cash to pay for his Christmas spending.He decided to postpone the sale from December 20Y1 until January 20Y2.Mr.Dole is taking advantage of the:

Accepted Answer

A) Entity variable 
B) Time period variable 
C) Jurisdiction variable 
D) Character variable 
A) Entity variable 
B) Time period variable 
C) Jurisdiction variable 
D) Character variable

Question 20

Which of the following statements is true?

Accepted Answer

A) Mary Gilly owns 100% of the stock of Gilly Inc.Both Mary and Gilly Inc.are taxpayers under federal law. 
B) The same rate schedule applies to both individual and corporate taxpayers. 
C) The tax provisions governing the computation of individual business income are separate and distinct from the tax provisions governing the computation of corporate business income. 
D) Mary Gilly owns 100% of the stock to Gilly Inc.Both Mary and Gilly Inc.are taxpayers under federal law and the tax provisions governing the computation of individual business income are separate and distinct from the tax provisions governing the computation of corporate business income. 
A) Mary Gilly owns 100% of the stock of Gilly Inc.Both Mary and Gilly Inc.are taxpayers under federal law. 
B) The same rate schedule applies to both individual and corporate taxpayers. 
C) The tax provisions governing the computation of individual business income are separate and distinct from the tax provisions governing the computation of corporate business income. 
D) Mary Gilly owns 100% of the stock to Gilly Inc.Both Mary and Gilly Inc.are taxpayers under federal law and the tax provisions governing the computation of individual business income are separate and distinct from the tax provisions governing the computation of corporate business income.

Opportunity cost refers to the decrease in NPV from a deferral of the receipt of before-tax cash flows.

Andrea Mitchell can shift income to her daughter,Lynn,by endorsing a check for $10,000 received for a client over to Lynn.

NWR Inc.is structuring a transaction that will require a $200,000 deductible cash expenditure.Which of the following structures is the most effective in terms of the time period variable?

Mrs.Day structures a transaction to shift income from her sole proprietorship to her grandson's business.This tax planning strategy may be taking advantage of the:

The substance over form doctrine allows the IRS to look through the legal formalities of a transaction to determine its true economic nature.

Which of the following entities is not a taxable entity for federal income tax purposes?

Mrs.Day structures a transaction to convert income from ordinary income to capital gain.This tax planning strategy may be taking advantage of the:

Corporations,LLCs,and partnerships are all taxable entities.

The time period variable is based on the time value of money.

The business purpose doctrine allows the IRS to collapse a series of intermediate transactions into a single transaction to determine the tax consequences of the arrangement in its entirety.

Both the individual and the corporate federal income tax rates are progressive.

Which of the following statements about the jurisdiction variable is true?

Which of the following statements about the time period variable is false?

A taxpayer may choose to accept a reduced market rate of return on an investment to take advantage of a tax preference associated with the investment.In such case,the taxpayer will pay a/an:

Mr.Dole needed to sell appreciated stock out of his investment portfolio to generate cash to pay for his Christmas spending.He decided to postpone the sale from December 20Y1 until January 20Y2.Mr.Dole is taking advantage of the:

Which of the following statements is true?

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Taxes As Transaction Costs

Tax Research

Taxable Income From Business Operations

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Nontaxable Exchanges

Sole Proprietorships, partnerships, llcs, and S Corporations

The Corporate Taxpayer

The Choice of Business Entity

Jurisdictional Issues in Business Taxation

The Individual Tax Formula

Compensation and Retirement Planning

Investment and Personal Financial Planning

Tax Consequences of Personal Activities

The Tax Compliance Process

Filters

Exam 4: Maxims of Income Tax Planning

Opportunity cost refers to the decrease in NPV from a deferral of the receipt of before-tax cash flows.

Andrea Mitchell can shift income to her daughter,Lynn,by endorsing a check for $10,000 received for a client over to Lynn.

NWR Inc.is structuring a transaction that will require a $200,000 deductible cash expenditure.Which of the following structures is the most effective in terms of the time period variable?

Mrs.Day structures a transaction to shift income from her sole proprietorship to her grandson's business.This tax planning strategy may be taking advantage of the:

The substance over form doctrine allows the IRS to look through the legal formalities of a transaction to determine its true economic nature.

Which of the following entities is not a taxable entity for federal income tax purposes?

Mrs.Day structures a transaction to convert income from ordinary income to capital gain.This tax planning strategy may be taking advantage of the:

Corporations,LLCs,and partnerships are all taxable entities.

The time period variable is based on the time value of money.

The business purpose doctrine allows the IRS to collapse a series of intermediate transactions into a single transaction to determine the tax consequences of the arrangement in its entirety.

Both the individual and the corporate federal income tax rates are progressive.

Which of the following statements about the jurisdiction variable is true?

Which of the following statements about the time period variable is false?

A taxpayer may choose to accept a reduced market rate of return on an investment to take advantage of a tax preference associated with the investment.In such case,the taxpayer will pay a/an:

Mr.Dole needed to sell appreciated stock out of his investment portfolio to generate cash to pay for his Christmas spending.He decided to postpone the sale from December 20Y1 until January 20Y2.Mr.Dole is taking advantage of the:

Which of the following statements is true?

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Taxes As Transaction Costs

Tax Research

Taxable Income From Business Operations

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Nontaxable Exchanges

Sole Proprietorships, partnerships, llcs, and S Corporations

The Corporate Taxpayer

The Choice of Business Entity

Jurisdictional Issues in Business Taxation

The Individual Tax Formula

Compensation and Retirement Planning

Investment and Personal Financial Planning

Tax Consequences of Personal Activities

The Tax Compliance Process

Filters