Exam 4: Maxims of Income Tax Planning

Mrs.Jax 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 Mrs.Jax's 37% regular tax rate,the income from investment 2 would be taxed at a 20% preferential rate,and the income from investment 3 is tax-exempt.The investments offer the following before-tax yields. Investment 1: 8.25% Investment 2: 7.5% Investment 3: 6.0% Which investment should Mrs.Jax select?

A reduced market rate of return on a tax-favored investment is called an implicit tax.

Mrs.Day structures a transaction to shift income from her New York business to her New Hampshire business.This tax planning strategy may be taking advantage of the:

The 15% preferential tax rate on capital gains has the same value to every individual taxpayer.

According to the assignment of income doctrine,income must be taxed to the person receiving the cash from an income-generating transaction.

Varson Inc.and Vonsell Inc.are owned by the same family.The family decides to purchase $150,000 of deductible advertising that will benefit the businesses operated by both corporations.Which of the following statements is true?

Mr.Hayes 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.Hayes' 24% 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: 9.0% Investment 2: 7.5% Investment 3: 6.0% Which investment should Mr.Hayes select?

The rate at which an item of income is taxed depends on the tax character of the income.

Jelk Company is structuring a transaction that will generate $140,000 taxable revenue and cash inflow.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 20Y1 tax year to her 20Y2 tax year.This tax planning strategy may be taking advantage of the:

Hilex Inc.structures a transaction to shift income from its California office to its Oregon office.This tax planning strategy may be taking advantage of the:

Tax planning strategies to enhance NPV must reflect all four tax planning maxims.

Which of the following statements about tax strategies is false?

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

Mrs.Lester has the choice between two transactions.Transaction A will generate $175,000 taxable cash flow in the current year (year 0).Transaction B will generate $160,000 cash flow in the current year,but Mrs.Lester will not be required to report $160,000 income for two years (year 2).Mrs.Lester has a 40% marginal tax rate and uses a 9% discount rate to compute NPV.Use Appendix A of your textbook provided to determine which of the following statements is true?

The entity variable is important because the amount of taxable income generated by a business depends on the type of entity conducting the business.

Hilex Inc.structures a transaction to shift income from one controlled subsidiary to another controlled subsidiary.This tax planning strategy may be taking advantage of the:

Mrs.Bern's marginal tax rate is 35%,and her grandson Jeff's marginal tax rate is 12%.Which of the following statement is false?

Pratt Company structured an income-generating transaction so that the $750,000 income and cash flow shifted to Pratt's wholly owned subsidiary,PTB Company.If Pratt's marginal tax rate is 21%,and PTB's tax rate is 10%,compute the tax savings from the income shift.

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