Question 1

Which of the following statements about implicit and explicit taxes is false?

Accepted Answer

A) The taxpayer pays an explicit tax to the taxing jurisdiction. 
B) An investment yielding ordinary income taxed at the regular tax rates should not have an implicit tax. 
C) Any implicit tax on investment income is always more than the explicit tax on the income. 
D) An implicit tax reduces the before-tax yield on an investment. 
A) The taxpayer pays an explicit tax to the taxing jurisdiction. 
B) An investment yielding ordinary income taxed at the regular tax rates should not have an implicit tax. 
C) Any implicit tax on investment income is always more than the explicit tax on the income. 
D) An implicit tax reduces the before-tax yield on an investment.

Question 2

A taxpayer who invests in a growth stock rather than a stock that pays an annual dividend is engaging in tax planning based on 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 3

Mr.Bearne paid $50,000 to a local spiritual healer and deducted the payment as a business expense of his sole proprietorship.The healer provided personal counseling to Mr.and Mrs.Bearne.Upon audit of the sole proprietorship's accounting records,the IRS agent disallowed the deduction by applying the:

Accepted Answer

A) Business purpose doctrine 
B) Assignment of income doctrine 
C) Economic substance doctrine 
D) Constructive payment doctrine 
A) Business purpose doctrine 
B) Assignment of income doctrine 
C) Economic substance doctrine 
D) Constructive payment doctrine

Question 4

Carter Inc.and CCC Inc.are owned by the same family.Carter's marginal tax rate is 21%,and CCC's marginal tax rate is 10%.Carter has the opportunity to engage in a transaction that will generate $500,000 taxable cash flow.Alternatively,CCC could engage in the transaction.However,CCC would incur an extra $42,500 deductible cash expense with respect to the transaction.Which of the following statements is true?

Accepted Answer

A) CCC should engage in the transaction to generate $16,750 more after-tax cash flow. 
B) Carter should engage in the transaction to avoid the extra expense. 
C) CCC should engage in the transaction because it has the lower marginal tax rate. 
D) Because Carter and CCC are owned by the same family,the family is indifferent as to which corporation engages in the transaction. 
A) CCC should engage in the transaction to generate $16,750 more after-tax cash flow. 
B) Carter should engage in the transaction to avoid the extra expense. 
C) CCC should engage in the transaction because it has the lower marginal tax rate. 
D) Because Carter and CCC are owned by the same family,the family is indifferent as to which corporation engages in the transaction.

Question 5

The after-tax cost of a dollar of deductible expense to a high-tax entity is less than the after-tax cost to a low-tax entity.

Accepted Answer

A) True 
 B)False

Question 6

Mrs.Reid made a gift to her 19-year old daughter Susan.Mrs.Reid's marginal tax rate is 35%,and Susan's marginal tax rate is 10%.Which of the following statements is true?

Accepted Answer

A) The gift consisted of a corporate bond that paid $10,000 interest to Susan this year.Even though Susan is the owner of the bond,Mrs.Reid must include the $10,000 in her taxable income. 
B) The gift consisted of a $2,600 rent check written by tenants who lease a duplex owned by Mrs.Reid.Even though Susan cashed the check,Mrs.Reid must include the $2,600 in her taxable income. 
C) The gift consisted of a lottery ticket.Six weeks after the gift,the ticket was drawn as a winner.Even though Susan received the $50,000 taxable prize because she was the rightful owner of the ticket,Mrs.Reid must include $50,000 in her taxable income. 
D) None of the above is true. 
A) The gift consisted of a corporate bond that paid $10,000 interest to Susan this year.Even though Susan is the owner of the bond,Mrs.Reid must include the $10,000 in her taxable income. 
B) The gift consisted of a $2,600 rent check written by tenants who lease a duplex owned by Mrs.Reid.Even though Susan cashed the check,Mrs.Reid must include the $2,600 in her taxable income. 
C) The gift consisted of a lottery ticket.Six weeks after the gift,the ticket was drawn as a winner.Even though Susan received the $50,000 taxable prize because she was the rightful owner of the ticket,Mrs.Reid must include $50,000 in her taxable income. 
D) None of the above is true.

Question 7

In the United States,individuals and corporations are the two entities that pay tax on business income.

Accepted Answer

A) True 
 B)False

Question 8

The tax character of an item of income can change when Congress amends the tax law.

Accepted Answer

A) True 
 B)False

Question 9

The assignment of income doctrine constrains tax deferral strategies.

Accepted Answer

A) True 
 B)False

Question 10

The goal of tax planning is to reduce tax costs or increase tax savings as much as possible.

Accepted Answer

A) True 
 B)False

Question 11

Deduction-shifting transactions usually occur between unrelated taxpayers.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements about tax planning is false?

Accepted Answer

A) The goal of tax planning is tax minimization. 
B) Tax planning involves structuring transactions to reduce tax costs or increase tax savings. 
C) Sound tax planning ideas should be entirely legal. 
D) None of the above is false. 
A) The goal of tax planning is tax minimization. 
B) Tax planning involves structuring transactions to reduce tax costs or increase tax savings. 
C) Sound tax planning ideas should be entirely legal. 
D) None of the above is false.

Question 13

Mr.Fox has $100,000 to invest.He could buy corporate bonds with a 10% before-tax yield or tax-exempt bonds with an 8% before-tax yield.Which of the following statements is false?

Accepted Answer

A) If Mr.Fox invests in the tax-exempt bonds,he will pay $2,000 implicit tax every year. 
B) If Mr.Fox's marginal tax rate is 15%,he should invest in the corporate bonds. 
C) If Mr.Fox's marginal tax rate is 37%,he should invest in the tax-exempt bonds. 
D) None of the above is false. 
A) If Mr.Fox invests in the tax-exempt bonds,he will pay $2,000 implicit tax every year. 
B) If Mr.Fox's marginal tax rate is 15%,he should invest in the corporate bonds. 
C) If Mr.Fox's marginal tax rate is 37%,he should invest in the tax-exempt bonds. 
D) None of the above is false.

Question 14

The income tax consequences of a business transaction depend on which entity engages in the transaction because:

Accepted Answer

A) The amount of income from the transaction depends on which type of entity engaged in the transaction. 
B) The transaction may be taxable or nontaxable depending on which type of entity engaged in the transaction. 
C) The rate at which the income from the transaction is taxed depends on which type of entity engaged in the transaction. 
D) The character of the income from the transaction depends on which type of entity engaged in the transaction. 
A) The amount of income from the transaction depends on which type of entity engaged in the transaction. 
B) The transaction may be taxable or nontaxable depending on which type of entity engaged in the transaction. 
C) The rate at which the income from the transaction is taxed depends on which type of entity engaged in the transaction. 
D) The character of the income from the transaction depends on which type of entity engaged in the transaction.

Question 15

Understal Company has $750,000 to invest and two competing investment opportunities.Investment 1 would pay 9% per year ($67,500 annual before-tax cash flow).Investment 2 would pay 7% per year ($52,500 annual before-tax cash flow).The return on Investment 1 is taxable at Understal's 35% rate on ordinary income,while the return on Investment 2 is taxable at a 20% preferential rate.
A.Compute the explicit and implicit tax that Understal would pay with respect to each investment.
B.Which investment results in the greater after-tax cash flow?

Accepted Answer

A.Understal would pay $23,625 explicit t

Question 16

Sancel Inc.is planning a transaction that will generate $70,000 taxable income and cash inflow.The transaction is structured so that Sancel will receive the cash and report the income this year (year 0).Use Appendix A of your textbook provided to compute the increase in the NPV of the transaction if it can be restructured so that Sancel will receive the cash this year,but report the income two years later (year 2).Sancel's marginal tax rate is 21%,and it uses a 10% discount rate to compute NPV.

Accepted Answer

A) $2,558 
B) $1,338 
C) $9,622 
D) None of the above 
A) $2,558 
B) $1,338 
C) $9,622 
D) None of the above

Question 17

JNC Company structured an income-generating transaction so that the income and cash flow shifted to Juno Inc.Presuming that JNC makes rational decisions,which of the following statements is false?

Accepted Answer

A) JNC and Juno must be related parties that share a mutual economic interest. 
B) JNC's marginal tax rate is higher than Juno's marginal tax rate. 
C) The income shift should increase the NPV of the transaction. 
D) None of the above is false. 
A) JNC and Juno must be related parties that share a mutual economic interest. 
B) JNC's marginal tax rate is higher than Juno's marginal tax rate. 
C) The income shift should increase the NPV of the transaction. 
D) None of the above is false.

Question 18

Hilex Inc.liquidates its investment in General Electric corporate bonds and reinvests the proceeds in City of Miami municipal bonds.This tax planning strategy may be taking advantage of the:

Accepted Answer

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

Question 19

Mr.Blau structured an income-generating transaction so that the $90,000 income and cash flow shifted to Mr.Blau's sister,Kim.If Mr.Blau's marginal tax rate is 35%,and Kim's tax rate is 12%,compute the tax savings from the income shift.

Accepted Answer

A) $0 
B) $10,800 
C) $31,500 
D) None of the above 
A) $0 
B) $10,800 
C) $31,500 
D) None of the above

Question 20

Mr.Erske plans to pay $100,000 for one of three investment alternatives that have the same risk.The income from investment 1 would be taxed at Mr.Erske's 32% regular tax rate,the income from investment 2 would be taxed at a 15% preferential rate,and the income from investment 3 is tax-exempt.The investments offer the following before-tax yields. Investment 1: 8.5%
Investment 2: 7.5%
Investment 3: 6.0%
Which investment should Mr.Erske select?

Accepted Answer

A) Investment 1 
B) Investment 2 
C) Investment 3 
D) Mr.Erske is neutral between investment 2 and investment 3. 
A) Investment 1 
B) Investment 2 
C) Investment 3 
D) Mr.Erske is neutral between investment 2 and investment 3.

Which of the following statements about implicit and explicit taxes is false?

A taxpayer who invests in a growth stock rather than a stock that pays an annual dividend is engaging in tax planning based on the:

Mr.Bearne paid $50,000 to a local spiritual healer and deducted the payment as a business expense of his sole proprietorship.The healer provided personal counseling to Mr.and Mrs.Bearne.Upon audit of the sole proprietorship's accounting records,the IRS agent disallowed the deduction by applying the:

The after-tax cost of a dollar of deductible expense to a high-tax entity is less than the after-tax cost to a low-tax entity.

Mrs.Reid made a gift to her 19-year old daughter Susan.Mrs.Reid's marginal tax rate is 35%,and Susan's marginal tax rate is 10%.Which of the following statements is true?

In the United States,individuals and corporations are the two entities that pay tax on business income.

The tax character of an item of income can change when Congress amends the tax law.

The assignment of income doctrine constrains tax deferral strategies.

The goal of tax planning is to reduce tax costs or increase tax savings as much as possible.

Deduction-shifting transactions usually occur between unrelated taxpayers.

Which of the following statements about tax planning is false?

Mr.Fox has $100,000 to invest.He could buy corporate bonds with a 10% before-tax yield or tax-exempt bonds with an 8% before-tax yield.Which of the following statements is false?

The income tax consequences of a business transaction depend on which entity engages in the transaction because:

JNC Company structured an income-generating transaction so that the income and cash flow shifted to Juno Inc.Presuming that JNC makes rational decisions,which of the following statements is false?

Hilex Inc.liquidates its investment in General Electric corporate bonds and reinvests the proceeds in City of Miami municipal bonds.This tax planning strategy may be taking advantage of the:

Mr.Blau structured an income-generating transaction so that the $90,000 income and cash flow shifted to Mr.Blau's sister,Kim.If Mr.Blau's marginal tax rate is 35%,and Kim's tax rate is 12%,compute the tax savings from the income shift.

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

Which of the following statements about implicit and explicit taxes is false?

A taxpayer who invests in a growth stock rather than a stock that pays an annual dividend is engaging in tax planning based on the:

The after-tax cost of a dollar of deductible expense to a high-tax entity is less than the after-tax cost to a low-tax entity.

Mrs.Reid made a gift to her 19-year old daughter Susan.Mrs.Reid's marginal tax rate is 35%,and Susan's marginal tax rate is 10%.Which of the following statements is true?

In the United States,individuals and corporations are the two entities that pay tax on business income.

The tax character of an item of income can change when Congress amends the tax law.

The assignment of income doctrine constrains tax deferral strategies.

The goal of tax planning is to reduce tax costs or increase tax savings as much as possible.

Deduction-shifting transactions usually occur between unrelated taxpayers.

Which of the following statements about tax planning is false?

Mr.Fox has $100,000 to invest.He could buy corporate bonds with a 10% before-tax yield or tax-exempt bonds with an 8% before-tax yield.Which of the following statements is false?

The income tax consequences of a business transaction depend on which entity engages in the transaction because:

JNC Company structured an income-generating transaction so that the income and cash flow shifted to Juno Inc.Presuming that JNC makes rational decisions,which of the following statements is false?

Hilex Inc.liquidates its investment in General Electric corporate bonds and reinvests the proceeds in City of Miami municipal bonds.This tax planning strategy may be taking advantage of the:

Mr.Blau structured an income-generating transaction so that the $90,000 income and cash flow shifted to Mr.Blau's sister,Kim.If Mr.Blau's marginal tax rate is 35%,and Kim's tax rate is 12%,compute the tax savings from the income shift.

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