Question 1

Tax law uncertainty is the risk that the Internal Revenue Service will challenge a taxpayer's tax treatment on audit.

Accepted Answer

A) True 
 B)False

Question 2

Mrs Scott received a $12,000 cash payment. If her marginal tax rate is 40%, which of the following statements is true?

Accepted Answer

A)  If only $9,200 of the payment is taxable income, her after-tax cash flow is $9,200. 
B)  If the payment is not taxable income, her after-tax cash flow is $12,000. 
C)  If the payment is taxable income, her after-tax cash flow is $4,800. 
D)  None of the above is true. 
A)  If only $9,200 of the payment is taxable income, her after-tax cash flow is $9,200. 
B)  If the payment is not taxable income, her after-tax cash flow is $12,000. 
C)  If the payment is taxable income, her after-tax cash flow is $4,800. 
D)  None of the above is true.

Question 3

Marginal rate uncertainty includes the risk that Congress will change tax rates, increasing the tax costs of future income.

Accepted Answer

A) True 
 B)False

Question 4

The tax cost of a transaction represents a cash inflow.

Accepted Answer

A) True 
 B)False

Question 5

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 6

BMX Company engaged in a current-year transaction that generated a $20,000 cash inflow. Which of the following statements is false?

Accepted Answer

A)  If the cash inflow is not taxable income, the current-year tax cost of the transaction is zero. 
B)  If the cash inflow is taxable income and BMX's marginal tax rate is 25%, the tax cost of the transaction is $5,000. 
C)  If the cash inflow is taxable income and BMX's marginal tax rate is 35%, the tax cost of the transaction is $7,000. 
D)  None of the above is false. 
A)  If the cash inflow is not taxable income, the current-year tax cost of the transaction is zero. 
B)  If the cash inflow is taxable income and BMX's marginal tax rate is 25%, the tax cost of the transaction is $5,000. 
C)  If the cash inflow is taxable income and BMX's marginal tax rate is 35%, the tax cost of the transaction is $7,000. 
D)  None of the above is false.

Question 7

Angela Jones is considering two investments. The first produces $5,000 of tax-exempt income. The second produces income that will be subject to tax at a rate of 15%. Which of the following statements is true regarding Angela's choice?

Accepted Answer

A)  Angela should always choose the first investment because it minimizes her tax costs. 
B)  If the second investment generates $5,500 of before-tax income, Angela should choose the first investment. 
C)  If the second investment generates $6,500 of before-tax income, Angela should choose the second investment. 
D)  Both if the second investment generates $5,500 of before-tax income, Angela should choose the first investment and if the second investment generates $6,500 of before-tax income, Angela should choose the second investment are true. 
A)  Angela should always choose the first investment because it minimizes her tax costs. 
B)  If the second investment generates $5,500 of before-tax income, Angela should choose the first investment. 
C)  If the second investment generates $6,500 of before-tax income, Angela should choose the second investment. 
D)  Both if the second investment generates $5,500 of before-tax income, Angela should choose the first investment and if the second investment generates $6,500 of before-tax income, Angela should choose the second investment are true.

Question 8

Use the present value tables included in Appendix B of your textbook to compute the NPV of four $25,000 payments received in years 0, 1, 2, and 3 at a 5% discount rate.

Accepted Answer

A)  $93,075.00 
B)  $88,650.00 
C)  $81,445.50 
D)  None of the above 
A)  $93,075.00 
B)  $88,650.00 
C)  $81,445.50 
D)  None of the above

Question 9

The tax savings from a deduction decreases as the taxpayer's marginal tax rate increases.

Accepted Answer

A) True 
 B)False

Question 10

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 11

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 12

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 13

Unlow Inc. must choose between two alternate transactions. Transaction 1 would generate $160,000 cash, all of which would be taxable, while transaction 2 would generate $120,000 cash, none of which would be taxable. Determine the marginal tax rate at which the after-tax cash flows from the two transactions are equal.

Accepted Answer

A)  15% 
B)  20% 
C)  25% 
D)  30% 
A)  15% 
B)  20% 
C)  25% 
D)  30%

Question 14

Mrs Biggs invested in a business that will generate the following cash flows over a three-year period. Use Appendix A.
If Mrs Biggs' marginal tax rate over the three year period is 30% and she uses a 6% discount rate, compute the NPV of the transaction.

Accepted Answer

A)  $61,453 
B)  $52,771 
C)  $47,781 
D)  None of the above. 
A)  $61,453 
B)  $52,771 
C)  $47,781 
D)  None of the above.

Question 15

If a taxpayer decides to take advantage of an ambiguous tax issue to reduce future tax costs, the decision increases:

Accepted Answer

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

Question 16

Mrs Scott loaned $100,000 to her daughter Evelyn, who agreed to pay her mother $3,000 annual interest on the debt. This loan is an example of a/an:

Accepted Answer

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

Question 17

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 18

An increase in the risk associated with a future stream of cash should result in an increase in the discount rate used in the present value calculation.

Accepted Answer

A) True 
 B)False

Question 19

The present value of a dollar available in a future period increases as the discount rate increases.

Accepted Answer

A) True 
 B)False

Question 20

Mr Quest plans to engage in a transaction that will generate $10,000 cash flow in year 0, year 1, and year 2 ($30,000 total cash flow). Which of the following statements is true?

Accepted Answer

A)  If the cash flow is not taxable income, the before-tax and after-tax cash flows from the transaction are equal. 
B)  If the cash flow is not taxable income, the NPV of the transaction is $30,000. 
C)  Mr. Quest's discount rate for computing the NPV of the transaction depends on his marginal tax rate. 
D)  None of the above is true. 
A)  If the cash flow is not taxable income, the before-tax and after-tax cash flows from the transaction are equal. 
B)  If the cash flow is not taxable income, the NPV of the transaction is $30,000. 
C)  Mr. Quest's discount rate for computing the NPV of the transaction depends on his marginal tax rate. 
D)  None of the above is true.

Tax law uncertainty is the risk that the Internal Revenue Service will challenge a taxpayer's tax treatment on audit.

Mrs Scott received a $12,000 cash payment. If her marginal tax rate is 40%, which of the following statements is true?

Marginal rate uncertainty includes the risk that Congress will change tax rates, increasing the tax costs of future income.

The tax cost of a transaction represents a cash inflow.

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.

BMX Company engaged in a current-year transaction that generated a $20,000 cash inflow. Which of the following statements is false?

Angela Jones is considering two investments. The first produces $5,000 of tax-exempt income. The second produces income that will be subject to tax at a rate of 15%. Which of the following statements is true regarding Angela's choice?

Use the present value tables included in Appendix B of your textbook to compute the NPV of four $25,000 payments received in years 0, 1, 2, and 3 at a 5% discount rate.

The tax savings from a deduction decreases as the taxpayer's marginal tax rate increases.

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:

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

The arm's length transaction presumption:

Mrs Biggs invested in a business that will generate the following cash flows over a three-year period. Use Appendix A. If Mrs Biggs' marginal tax rate over the three year period is 30% and she uses a 6% discount rate, compute the NPV of the transaction.

If a taxpayer decides to take advantage of an ambiguous tax issue to reduce future tax costs, the decision increases:

Mrs Scott loaned $100,000 to her daughter Evelyn, who agreed to pay her mother $3,000 annual interest on the debt. This loan is an example of a/an:

Which of the following statements about discount rates is true?

An increase in the risk associated with a future stream of cash should result in an increase in the discount rate used in the present value calculation.

The present value of a dollar available in a future period increases as the discount rate increases.

Mr Quest plans to engage in a transaction that will generate $10,000 cash flow in year 0, year 1, and year 2 ($30,000 total cash flow). Which of the following statements is true?

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

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

Tax law uncertainty is the risk that the Internal Revenue Service will challenge a taxpayer's tax treatment on audit.

Mrs Scott received a $12,000 cash payment. If her marginal tax rate is 40%, which of the following statements is true?

Marginal rate uncertainty includes the risk that Congress will change tax rates, increasing the tax costs of future income.

The tax cost of a transaction represents a cash inflow.

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.

BMX Company engaged in a current-year transaction that generated a $20,000 cash inflow. Which of the following statements is false?

Angela Jones is considering two investments. The first produces $5,000 of tax-exempt income. The second produces income that will be subject to tax at a rate of 15%. Which of the following statements is true regarding Angela's choice?

Use the present value tables included in Appendix B of your textbook to compute the NPV of four $25,000 payments received in years 0, 1, 2, and 3 at a 5% discount rate.

The tax savings from a deduction decreases as the taxpayer's marginal tax rate increases.

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:

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

The arm's length transaction presumption:

Mrs Biggs invested in a business that will generate the following cash flows over a three-year period. Use Appendix A. If Mrs Biggs' marginal tax rate over the three year period is 30% and she uses a 6% discount rate, compute the NPV of the transaction.

If a taxpayer decides to take advantage of an ambiguous tax issue to reduce future tax costs, the decision increases:

Mrs Scott loaned $100,000 to her daughter Evelyn, who agreed to pay her mother $3,000 annual interest on the debt. This loan is an example of a/an:

Which of the following statements about discount rates is true?

An increase in the risk associated with a future stream of cash should result in an increase in the discount rate used in the present value calculation.

The present value of a dollar available in a future period increases as the discount rate increases.

Mr Quest plans to engage in a transaction that will generate $10,000 cash flow in year 0, year 1, and year 2 ($30,000 total cash flow). Which of the following statements is true?

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

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