Question 1

The transacting parties can engage in bilateral tax planning when a transaction occurs in a:

Accepted Answer

A) Public market 
B) Private market 
C) Secondary market 
D) None of the above 
A) Public market 
B) Private market 
C) Secondary market 
D) None of the above

Question 2

Which of the following statements concerning related party transactions is false?

Accepted Answer

A) The federal tax law prohibits related party transactions. 
B) Related parties enjoy significant flexibility in controlling the tax consequences of their transactions. 
C) A related party transactions is more likely to be scrutinized relative to a public transaction to ensure it meets an arm's length standard. 
D) The IRS always disallows any favorable tax consequences of related party transactions. 
A) The federal tax law prohibits related party transactions. 
B) Related parties enjoy significant flexibility in controlling the tax consequences of their transactions. 
C) A related party transactions is more likely to be scrutinized relative to a public transaction to ensure it meets an arm's length standard. 
D) The IRS always disallows any favorable tax consequences of related party transactions.

Question 3

The arm's length transaction presumption:

Accepted Answer

A) Assumes that each party is dealing in its own economic self-interest. 
B) Cannot be satisfied in a private market transaction. 
C) Requires direct negotiation between parties to ensure an arm's length price. 
D) Applies to both related party and unrelated party transactions. 
A) Assumes that each party is dealing in its own economic self-interest. 
B) Cannot be satisfied in a private market transaction. 
C) Requires direct negotiation between parties to ensure an arm's length price. 
D) Applies to both related party and unrelated party transactions.

Question 4

Mr.Jessel sold 4,200 shares of stock in a publicly held corporation through his stock broker.This transaction occurred in a private market.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements about discount rates is true?

Accepted Answer

A) The higher the marginal tax rate,the higher the discount rate for future cash flows should be. 
B) The higher the degree of risk involved in a transaction,the higher the discount rate for future cash flows should be. 
C) The longer the time period over which a transaction will generate cash flows,the higher the discount rate should be. 
D) The greater the amount of cash generated by a transaction,the higher the discount rate should be. 
A) The higher the marginal tax rate,the higher the discount rate for future cash flows should be. 
B) The higher the degree of risk involved in a transaction,the higher the discount rate for future cash flows should be. 
C) The longer the time period over which a transaction will generate cash flows,the higher the discount rate should be. 
D) The greater the amount of cash generated by a transaction,the higher the discount rate should be.

Question 6

A taxpayer's marginal tax rate and discount rate are independent variables in the NPV calculation.

Accepted Answer

A) True 
 B)False

Question 7

Leto Inc.has $500,000 in an investment paying 8% annual taxable interest.Each year,the corporation incurs a $3,000 nondeductible cash expense relating to the investment.If Leto's marginal tax rate is 35%,compute the annual after-tax cash flow.

Accepted Answer

A) $23,000 
B) $24,050 
C) $37,000 
D) None of the above. 
A) $23,000 
B) $24,050 
C) $37,000 
D) None of the above.

Question 8

When the IRS audits a tax return,it is most likely to scrutinize the tax consequences of a/an:

Accepted Answer

A) Related party transaction 
B) Private market transaction 
C) Public market transaction 
D) Arm's length transaction 
A) Related party transaction 
B) Private market transaction 
C) Public market transaction 
D) Arm's length transaction

Question 9

Hower Inc.'s tax advisor recommends that the corporation take a deduction that the IRS has disallowed for other corporations in similar circumstances.If Hower decides not to take the deduction,it is reducing:

Accepted Answer

A) Audit risk 
B) Tax law uncertainty 
C) Business risk 
D) None of the above 
A) Audit risk 
B) Tax law uncertainty 
C) Business risk 
D) None of the above

Question 10

Mr.and Mrs.Rath invested in a business that will generate the following cash flows over a three-year period.Use Appendix A.   If the Raths' marginal tax rate over the three-year period is 20% and they use a 6% discount rate,compute the NPV of the transaction.

Accepted Answer

A) $59,340 
B) $55,996 
C) $50,413 
D) None of the above. 
A) $59,340 
B) $55,996 
C) $50,413 
D) None of the above.

Question 11

TallBoy Inc.is a local furniture manufacturer and Leley Company is a retail furniture store.The two companies have no owners in common.Leley recently negotiated to purchase $845,000 of furniture from TallBoy.This purchase is an example of a/an:

Accepted Answer

A) Related party transaction 
B) Public market transaction 
C) Arm's length transaction 
D) None of the above 
A) Related party transaction 
B) Public market transaction 
C) Arm's length transaction 
D) None of the above

Question 12

Ms.Owen purchased 2,000 shares of General Electric common stock through her broker.This purchase is an example of a:

Accepted Answer

A) Public market transaction 
B) Fictitious market transaction 
C) Private market transaction 
D) Related party transaction 
A) Public market transaction 
B) Fictitious market transaction 
C) Private market transaction 
D) Related party transaction

Question 13

Mr.Vail made an offer to purchase a business for sale by Mr.Craig.Mr.Vail and Mr.Craig had never met prior to their negotiation of the terms of the sale.The sale is an example of a/an:

Accepted Answer

A) Arm's length transaction 
B) Private market transaction 
C) Public market transaction 
D) Both an arm's length transaction and a private market transaction are true. 
A) Arm's length transaction 
B) Private market transaction 
C) Public market transaction 
D) Both an arm's length transaction and a private market transaction are true.

Question 14

If Congress enacts legislation late in the year that is retroactive to the beginning of the year,the legislation increases:

Accepted Answer

A) Audit risk 
B) Tax law uncertainty 
C) Financial risk 
D) Marginal tax rate uncertainty 
A) Audit risk 
B) Tax law uncertainty 
C) Financial risk 
D) Marginal tax rate uncertainty

Question 15

Yawl Inc.must choose between two business opportunities: Opportunity 1 will generate $40,000 before-tax cash flow in years 0,1,and 2,with a $7,000 annual tax cost.Opportunity 2 will also generate $40,000 before-tax cash flow in years 0,1,and 2.However,the tax cost will be $15,000 in year 0,$2,500 in year 2,and $2,500 in year 3.Which opportunity should Yawl choose if it uses a 6% discount rate to compute NPV (round the calculations to the nearest whole dollar)?

Accepted Answer

Opportunity 1 has a $93,489 NPV ($33,000

Question 16

The arm's length transaction presumption is unreliable for transactions between related parties.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements about public market transactions is true?

Accepted Answer

A) The parties negotiate directly with each other. 
B) The parties must engage in unilateral instead of bilateral tax planning. 
C) The parties are not transacting at arm's length. 
D) Both parties have flexibility in determining the legal and financial characteristics of the transaction. 
A) The parties negotiate directly with each other. 
B) The parties must engage in unilateral instead of bilateral tax planning. 
C) The parties are not transacting at arm's length. 
D) Both parties have flexibility in determining the legal and financial characteristics of the transaction.

Question 18

Ms.Kent has $200,000 in an investment paying 8% annual interest.Her marginal tax rate is 40%.Which of the following statements is false?

Accepted Answer

A) Ms.Kent's annual before-tax cash flow from this investment is $16,000. 
B) If the interest is tax-exempt,Ms.Kent's annual after-tax cash flow is $16,000. 
C) If the interest is taxable,Ms.Kent's annual after-tax cash flow is $6,400. 
D) None of the above is false. 
A) Ms.Kent's annual before-tax cash flow from this investment is $16,000. 
B) If the interest is tax-exempt,Ms.Kent's annual after-tax cash flow is $16,000. 
C) If the interest is taxable,Ms.Kent's annual after-tax cash flow is $6,400. 
D) None of the above is false.

Question 19

Which of the following statements about discount rates is false?

Accepted Answer

A) A discount rate for computing NPV cannot change from one period to the next. 
B) The discount rate for a risky investment should be higher than the discount rate for a risk-free investment. 
C) Discount rates can be applied either to the cash flow from a transaction or the taxable income from a transaction. 
D) Both a discount rate for computing NPV cannot change from one period to the next and discount rates can be applied either to the cash flow from a transaction or the taxable income from a transaction. 
A) A discount rate for computing NPV cannot change from one period to the next. 
B) The discount rate for a risky investment should be higher than the discount rate for a risk-free investment. 
C) Discount rates can be applied either to the cash flow from a transaction or the taxable income from a transaction. 
D) Both a discount rate for computing NPV cannot change from one period to the next and discount rates can be applied either to the cash flow from a transaction or the taxable income from a transaction.

Question 20

A cash flow consisting of a constant dollar amount to be received for a specific number of future periods is called an annuity.

Accepted Answer

A) True 
 B)False

The transacting parties can engage in bilateral tax planning when a transaction occurs in a:

Which of the following statements concerning related party transactions is false?

The arm's length transaction presumption:

Mr.Jessel sold 4,200 shares of stock in a publicly held corporation through his stock broker.This transaction occurred in a private market.

Which of the following statements about discount rates is true?

A taxpayer's marginal tax rate and discount rate are independent variables in the NPV calculation.

Leto Inc.has $500,000 in an investment paying 8% annual taxable interest.Each year,the corporation incurs a $3,000 nondeductible cash expense relating to the investment.If Leto's marginal tax rate is 35%,compute the annual after-tax cash flow.

When the IRS audits a tax return,it is most likely to scrutinize the tax consequences of a/an:

Hower Inc.'s tax advisor recommends that the corporation take a deduction that the IRS has disallowed for other corporations in similar circumstances.If Hower decides not to take the deduction,it is reducing:

Mr.and Mrs.Rath invested in a business that will generate the following cash flows over a three-year period.Use Appendix A. If the Raths' marginal tax rate over the three-year period is 20% and they use a 6% discount rate,compute the NPV of the transaction.

TallBoy Inc.is a local furniture manufacturer and Leley Company is a retail furniture store.The two companies have no owners in common.Leley recently negotiated to purchase $845,000 of furniture from TallBoy.This purchase is an example of a/an:

Ms.Owen purchased 2,000 shares of General Electric common stock through her broker.This purchase is an example of a:

Mr.Vail made an offer to purchase a business for sale by Mr.Craig.Mr.Vail and Mr.Craig had never met prior to their negotiation of the terms of the sale.The sale is an example of a/an:

If Congress enacts legislation late in the year that is retroactive to the beginning of the year,the legislation increases:

The arm's length transaction presumption is unreliable for transactions between related parties.

Which of the following statements about public market transactions is true?

Ms.Kent has $200,000 in an investment paying 8% annual interest.Her marginal tax rate is 40%.Which of the following statements is false?

Which of the following statements about discount rates is false?

A cash flow consisting of a constant dollar amount to be received for a specific number of future periods is called an annuity.

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Maxims of Income Tax Planning

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 3: Taxes As Transaction Costs

The transacting parties can engage in bilateral tax planning when a transaction occurs in a:

Which of the following statements concerning related party transactions is false?

The arm's length transaction presumption:

Mr.Jessel sold 4,200 shares of stock in a publicly held corporation through his stock broker.This transaction occurred in a private market.

Which of the following statements about discount rates is true?

A taxpayer's marginal tax rate and discount rate are independent variables in the NPV calculation.

Leto Inc.has $500,000 in an investment paying 8% annual taxable interest.Each year,the corporation incurs a $3,000 nondeductible cash expense relating to the investment.If Leto's marginal tax rate is 35%,compute the annual after-tax cash flow.

When the IRS audits a tax return,it is most likely to scrutinize the tax consequences of a/an:

Hower Inc.'s tax advisor recommends that the corporation take a deduction that the IRS has disallowed for other corporations in similar circumstances.If Hower decides not to take the deduction,it is reducing:

Mr.and Mrs.Rath invested in a business that will generate the following cash flows over a three-year period.Use Appendix A. If the Raths' marginal tax rate over the three-year period is 20% and they use a 6% discount rate,compute the NPV of the transaction.

TallBoy Inc.is a local furniture manufacturer and Leley Company is a retail furniture store.The two companies have no owners in common.Leley recently negotiated to purchase $845,000 of furniture from TallBoy.This purchase is an example of a/an:

Ms.Owen purchased 2,000 shares of General Electric common stock through her broker.This purchase is an example of a:

Mr.Vail made an offer to purchase a business for sale by Mr.Craig.Mr.Vail and Mr.Craig had never met prior to their negotiation of the terms of the sale.The sale is an example of a/an:

If Congress enacts legislation late in the year that is retroactive to the beginning of the year,the legislation increases:

The arm's length transaction presumption is unreliable for transactions between related parties.

Which of the following statements about public market transactions is true?

Ms.Kent has $200,000 in an investment paying 8% annual interest.Her marginal tax rate is 40%.Which of the following statements is false?

Which of the following statements about discount rates is false?

A cash flow consisting of a constant dollar amount to be received for a specific number of future periods is called an annuity.

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Maxims of Income Tax Planning

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