Question 1

Tax evasion is a federal crime punishable by imprisonment.

Accepted Answer

A) True 
 B)False  True

Question 2

Tax avoidance is the reduction of a person's tax liability through illegal means.

Accepted Answer

A) True 
 B)False  False

Question 3

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

Accepted Answer

A)  The tax character of income is determined strictly by tax law. 
B)  The tax character of income cannot change from year to year. 
C)  Tax planning strategies based on the character variable must involve at least two different taxpayers. 
D)  The tax character of income cannot change from year to year and tax planning strategies based on the character variable must involve at least two different taxpayers. 
A)  The tax character of income is determined strictly by tax law. 
B)  The tax character of income cannot change from year to year. 
C)  Tax planning strategies based on the character variable must involve at least two different taxpayers. 
D)  The tax character of income cannot change from year to year and tax planning strategies based on the character variable must involve at least two different taxpayers. A

Question 4

Nilo Inc. sold an asset to PPQ Partnership, which is unrelated to Nilo. PPQ immediately sold the property to Nilo Western Inc., which is a 100% controlled Nilo subsidiary. The IRS could treat the two sales as one sale of the asset by Nilo to Nilo Western by applying the:

Accepted Answer

A)  Economic substance doctrine 
B)  Assignment of income doctrine 
C)  Step transaction doctrine 
D)  Constructive receipt doctrine 
A)  Economic substance doctrine 
B)  Assignment of income doctrine 
C)  Step transaction doctrine 
D)  Constructive receipt doctrine

Question 5

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 6

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

Accepted Answer

A) True 
 B)False

Question 7

A taxpayer should prefer to pay a $100 implicit tax rather than a $100 explicit tax.

Accepted Answer

A) True 
 B)False

Question 8

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 9

Bailey Inc. is planning a transaction that requires a $60,000 deductible cash expenditure. The transaction is structured so that Bailey will pay the cash and report the deduction 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 Bailey will report the deduction this year, but pay the cash two years later (year 2). Bailey's marginal tax rate is 25%, and it uses a 9% discount rate to compute NPV.

Accepted Answer

A)  $8,677 
B)  $9,014 
C)  $9,480 
D)  None of these choices are correct. 
A)  $8,677 
B)  $9,014 
C)  $9,480 
D)  None of these choices are correct.

Question 10

Which of the following statements about the entity variable is false?

Accepted Answer

A)  If Congress replaced the current progressive income tax rates with a proportionate rate applying to all taxpayers, the entity variable would no longer be a factor in tax planning. 
B)  The entity variable becomes more important when Congress increases the progressivity of the income tax. 
C)  Tax planning strategies based on the entity variable must involve at least two different taxpayers. 
D)  Tax planning strategies based on the entity variable must involve some type of income taxed at a preferential rate. 
A)  If Congress replaced the current progressive income tax rates with a proportionate rate applying to all taxpayers, the entity variable would no longer be a factor in tax planning. 
B)  The entity variable becomes more important when Congress increases the progressivity of the income tax. 
C)  Tax planning strategies based on the entity variable must involve at least two different taxpayers. 
D)  Tax planning strategies based on the entity variable must involve some type of income taxed at a preferential rate.

Question 11

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.

Accepted Answer

A)  $157,500 
B)  $75,000 
C)  $82,500 
D)  $78,750 
A)  $157,500 
B)  $75,000 
C)  $82,500 
D)  $78,750

Question 12

Which of the following statements about tax avoidance and tax evasion is false?

Accepted Answer

A)  Tax avoidance is legal, while tax evasion is illegal. 
B)  The difference between avoidance and evasion is clearly defined in the tax law. 
C)  Tax evasion is a federal felony offence. 
D)  Taxpayers should not regard tax avoidance as unethical. 
A)  Tax avoidance is legal, while tax evasion is illegal. 
B)  The difference between avoidance and evasion is clearly defined in the tax law. 
C)  Tax evasion is a federal felony offence. 
D)  Taxpayers should not regard tax avoidance as unethical.

Question 13

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 these choices are 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 these choices are true.

Question 14

Income-shifting transactions occur more frequently between related parties than between unrelated parties.

Accepted Answer

A) True 
 B)False

Question 15

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?

Accepted Answer

A)  Jelk will receive the cash and report the income in 20Y1. 
B)  Jelk will receive the cash in 20Y2 and report the income in 20Y1. 
C)  Jelk will receive the cash and report the income in 20Y2. 
D)  Jelk will receive the cash in 20Y1 and report the income in 20Y2. 
A)  Jelk will receive the cash and report the income in 20Y1. 
B)  Jelk will receive the cash in 20Y2 and report the income in 20Y1. 
C)  Jelk will receive the cash and report the income in 20Y2. 
D)  Jelk will receive the cash in 20Y1 and report the income in 20Y2.

Question 16

Planning opportunities are created when the tax law applies differentially to alternative business transactions.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

The assignment of income doctrine indicates that:

Accepted Answer

A)  Income from a transaction must be taxed to the person who receives the cash from the transaction. 
B)  Income from a transaction must be taxed to the person who reports the transaction on his or her tax return. 
C)  Income from a transaction must be taxed to the person that earns the income. 
D)  None of these choices are correct. 
A)  Income from a transaction must be taxed to the person who receives the cash from the transaction. 
B)  Income from a transaction must be taxed to the person who reports the transaction on his or her tax return. 
C)  Income from a transaction must be taxed to the person that earns the income. 
D)  None of these choices are correct.

Question 19

The tax law applies uniformly to every commercial transaction by every business entity.

Accepted Answer

A) True 
 B)False

Question 20

In 20Y1, Ms. Graves transferred appreciated property to KL Partnership in exchange for an ownership interest in the partnership. She deliberately waited until 20Y3 before taking cash out of the partnership. Ms. Graves may have been trying to prevent the IRS from applying the:

Accepted Answer

A)  Business purpose doctrine 
B)  Economic substance doctrine 
C)  Substance over form doctrine 
D)  Step transaction doctrine 
A)  Business purpose doctrine 
B)  Economic substance doctrine 
C)  Substance over form doctrine 
D)  Step transaction doctrine

Tax evasion is a federal crime punishable by imprisonment.

Tax avoidance is the reduction of a person's tax liability through illegal means.

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

Nilo Inc. sold an asset to PPQ Partnership, which is unrelated to Nilo. PPQ immediately sold the property to Nilo Western Inc., which is a 100% controlled Nilo subsidiary. The IRS could treat the two sales as one sale of the asset by Nilo to Nilo Western by applying the:

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:

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

A taxpayer should prefer to pay a $100 implicit tax rather than a $100 explicit tax.

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:

Which of the following statements about the entity variable 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 tax avoidance and tax evasion is false?

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?

Income-shifting transactions occur more frequently between related parties than between unrelated parties.

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?

Planning opportunities are created when the tax law applies differentially to alternative business transactions.

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

The assignment of income doctrine indicates that:

The tax law applies uniformly to every commercial transaction by every business entity.

In 20Y1, Ms. Graves transferred appreciated property to KL Partnership in exchange for an ownership interest in the partnership. She deliberately waited until 20Y3 before taking cash out of the partnership. Ms. Graves may have been trying to prevent the IRS from applying the:

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

Tax evasion is a federal crime punishable by imprisonment.

Tax avoidance is the reduction of a person's tax liability through illegal means.

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

Nilo Inc. sold an asset to PPQ Partnership, which is unrelated to Nilo. PPQ immediately sold the property to Nilo Western Inc., which is a 100% controlled Nilo subsidiary. The IRS could treat the two sales as one sale of the asset by Nilo to Nilo Western by applying the:

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:

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

A taxpayer should prefer to pay a $100 implicit tax rather than a $100 explicit tax.

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:

Which of the following statements about the entity variable 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 tax avoidance and tax evasion is false?

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?

Income-shifting transactions occur more frequently between related parties than between unrelated parties.

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?

Planning opportunities are created when the tax law applies differentially to alternative business transactions.

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

The assignment of income doctrine indicates that:

The tax law applies uniformly to every commercial transaction by every business entity.

In 20Y1, Ms. Graves transferred appreciated property to KL Partnership in exchange for an ownership interest in the partnership. She deliberately waited until 20Y3 before taking cash out of the partnership. Ms. Graves may have been trying to prevent the IRS from applying the:

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