Exam 4: Maxims of Income Tax Planning

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.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?

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:

Which of the following statements about implicit and explicit taxes is false?

Which of the following entities is not a taxable entity for federal income tax purposes?

Which of the following statements about tax planning is false?

Sancel Inc.is planning a transaction that will generate $70,000 taxable income and cash inflow.The transaction is structured so that Sancel 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 Sancel will receive the cash this year,but report the income two years later (year 2).Sancel's marginal tax rate is 30%,and it uses a 10% discount rate to compute NPV.

Which of the following statements about tax deferral is true?

Mr.Crum,an architect,billed a client $12,500 for professional services rendered.When Mr.Crum received a check in full payment from the client,he endorsed the check and mailed it to his college-age son,Paul,who cashed it and deposited the $12,500 in his own bank account.Which of the following statements is a correct application of the assignment of income doctrine?

The after-tax cost of a dollar of deductible expense to a high-tax entity is less than the after-tax cost to a low-tax entity.

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

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

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

Mrs.James plans to invest in one of two investment alternatives having the same risk.Investment 1 has a before-tax return of 10% and the income from investment 1 would be taxed at Mrs.James' 35% regular tax rate.Investment 2 has a before-tax return of 8% and the income from investment 2 would be taxed at a 15% preferential rate.Which of the following statements regarding these investment choices is false?

Opportunity cost refers to the decrease in NPV from a deferral of the receipt of before-tax cash flows.

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 35%,and it uses a 7% discount rate to compute NPV.

Mrs.Day structures a transaction to shift income from her New York business to her New Hampshire business.This tax planning strategy may be taking advantage of the:

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 15%,compute the tax savings from the income shift.

Corporations,LLCs,and partnerships are all taxable entities.

Understal Company has $750,000 to invest and two competing investment opportunities.Investment 1 would pay 9% per year ($67,500 annual before-tax cash flow).Investment 2 would pay 7% per year ($52,500 annual before-tax cash flow).The return on Investment 1 is taxable at Understal's 35% rate on ordinary income,while the return on Investment 2 is taxable at a 20% preferential rate. A.Compute the explicit and implicit tax that Understal would pay with respect to each investment. B.Which investment results in the greater after-tax cash flow?