Exam 4: Maxims of Income Tax Planning

Hubern Inc. is planning a transaction that will generate $275,000 taxable income and cash inflow. The transaction is structured so that Hubern will receive the cash and report the income 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 Hubern will receive the cash this year, but report the income one year later (year 1). Hubern's marginal tax rate is 21%, and it uses a 9% discount rate to compute NPV. 

Mr Erske 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 Erske's 32% 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: 8.5% Investment 2: 7.5% Investment 3: 6.0% Which investment should Mr Erske select?

The tax law provides that individuals do not pay tax on the first $250,000 of gain realized on the sale of a principal residence. This rule is an example of the: 

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

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 three years later (year 3). Bailey's marginal tax rate is 25%, and it uses a 9% discount rate to compute NPV. 

JNC Company structured an income-generating transaction so that the income and cash flow shifted to Juno Inc. Presuming that JNC makes rational decisions, which of the following statements is false? 

Which of the following statements about implicit and explicit taxes 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. 

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

The income tax consequences of a business transaction depend on which entity engages in the transaction because:  

Which of the following statements about the time period variable is false?  

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:  

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

Municipal bond investments bear less implicit tax than investments in taxable corporate bonds.  

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

Which of the following statements about ordinary income and capital gain is true? 

The business purpose doctrine allows the IRS to collapse a series of intermediate transactions into a single transaction to determine the tax consequences of the arrangement in its entirety.  

A taxpayer may choose to accept a reduced market rate of return on an investment to take advantage of a tax preference associated with the investment. In such case, the taxpayer will pay a/an: 

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? 

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: