Question 1

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

Accepted Answer

A)  Most businesses are subject to the taxing jurisdiction of more than one government. 
B)  For federal purposes, state income taxes are deductible in the computation of taxable income. 
C)  Businesses can often minimize total tax burden by conducting business in jurisdictions with favorable tax climates. 
D)  All of the above statements are true. 
A)  Most businesses are subject to the taxing jurisdiction of more than one government. 
B)  For federal purposes, state income taxes are deductible in the computation of taxable income. 
C)  Businesses can often minimize total tax burden by conducting business in jurisdictions with favorable tax climates. 
D)  All of the above statements are true.

Question 2

Mrs Day structures a transaction to convert income from ordinary income to capital gain. This tax planning strategy may be taking advantage of 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

Andrea Mitchell can shift income to her daughter, Lynn, by endorsing a check for $10,000 received for a client over to Lynn.

Accepted Answer

A) True 
 B)False

Question 4

Corporations, LLCs, and partnerships are all taxable entities.

Accepted Answer

A) True 
 B)False

Question 5

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 6

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

Question 7

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 8

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

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Mr Coomb structured a transfer of real estate to his daughter as a sale. Upon audit, the IRS agent analyzed the economic consequences of the transfer and treated it as a gift by applying the:

Accepted Answer

A)  Business purpose doctrine 
B)  Substance over form doctrine 
C)  Assignment of income doctrine 
D)  Step transaction doctrine 
A)  Business purpose doctrine 
B)  Substance over form doctrine 
C)  Assignment of income doctrine 
D)  Step transaction doctrine

Question 11

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:

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 12

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

Accepted Answer

A) True 
 B)False

Question 13

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 14

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 15

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 16

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?

Accepted Answer

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

Question 17

Acme Inc. is planning a transaction that requires a $100,000 deductible cash expenditure. The transaction is structured so that Acme 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 Acme will report the deduction this year, but pay the cash three years later (year 3). Acme's marginal tax rate is 21%, and it uses a 7% discount rate to compute NPV.

Accepted Answer

A)  $15,928 
B)  $18,400 
C)  $21,516 
D)  None of the above 
A)  $15,928 
B)  $18,400 
C)  $21,516 
D)  None of the above

Question 18

Deduction-shifting transactions usually occur between unrelated taxpayers.

Accepted Answer

A) True 
 B)False

Question 19

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 20

Which of the following statements about tax legal doctrines is false?

Accepted Answer

A)  The scope of the economic substance, business purpose, substance over form, and step transaction doctrines often overlap. 
B)  Taxpayers can invoke the substance over form doctrine to undo the tax consequences of a failed planning strategy. 
C)  The IRS's application of the doctrines is subjective. 
D)  The economic substance, business purpose, substance over form, and step transaction doctrines increase the uncertainty of the tax law. 
A)  The scope of the economic substance, business purpose, substance over form, and step transaction doctrines often overlap. 
B)  Taxpayers can invoke the substance over form doctrine to undo the tax consequences of a failed planning strategy. 
C)  The IRS's application of the doctrines is subjective. 
D)  The economic substance, business purpose, substance over form, and step transaction doctrines increase the uncertainty of the tax law.

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

Mrs Day structures a transaction to convert income from ordinary income to capital gain. This tax planning strategy may be taking advantage of the:

Andrea Mitchell can shift income to her daughter, Lynn, by endorsing a check for $10,000 received for a client over to Lynn.

Corporations, LLCs, and partnerships are all taxable entities.

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:

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:

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

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

Mr Coomb structured a transfer of real estate to his daughter as a sale. Upon audit, the IRS agent analyzed the economic consequences of the transfer and treated it as a gift by applying the:

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:

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

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?

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.

Deduction-shifting transactions usually occur between unrelated taxpayers.

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?

Which of the following statements about tax legal doctrines is false?

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

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 the jurisdiction variable is true?

Mrs Day structures a transaction to convert income from ordinary income to capital gain. This tax planning strategy may be taking advantage of the:

Andrea Mitchell can shift income to her daughter, Lynn, by endorsing a check for $10,000 received for a client over to Lynn.

Corporations, LLCs, and partnerships are all taxable entities.

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:

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:

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

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

Mr Coomb structured a transfer of real estate to his daughter as a sale. Upon audit, the IRS agent analyzed the economic consequences of the transfer and treated it as a gift by applying the:

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:

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

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?

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.

Deduction-shifting transactions usually occur between unrelated taxpayers.

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?

Which of the following statements about tax legal doctrines is false?

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

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