Exam 4: Maxims of Income Tax Planning

Carter Inc.and CCC Inc.are owned by the same family.Carter's marginal tax rate is 30%,and CCC's marginal tax rate is 20%.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?

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 40%,and it uses a 9% discount rate to compute NPV.

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:

Tax planning strategies to enhance NPV must reflect all four tax planning maxims.

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

NWR Inc.is structuring a transaction that will require a $200,000 deductible cash expenditure.Which of the following structures is the most effective in terms of the time period variable?

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

Mrs.Day structures a transaction to shift income from her sole proprietorship to her grandson's business.This tax planning strategy may be taking advantage of the:

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

OWB Inc.and Owin Inc.are owned by the same family.OWB's marginal tax rate is 40%,and Owin's marginal tax rate is 25%.OWB has the opportunity to engage in a transaction that will generate $250,000 taxable cash flow.Alternatively,Owin could engage in the transaction.However,Owin would incur an extra $60,000 deductible cash expense with respect to the transaction.Which of the following statements is true?

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

Mr.Cox has the choice between two transactions.Transaction A will generate $500,000 taxable cash flow in the current year (year 0).Transaction B will generate $460,000 cash flow in the current year,but Mr.Cox will not be required to report $460,000 income until next year (year 1).Mr.Cox has a 40% marginal tax rate and uses a 10% discount rate to compute NPV.Use Appendix A of your textbook provided to determine which of the following statements is true?

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

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

A planning strategy that defers a tax cost without deferring the receipt of before-tax cash flows decreases the NPV of the transaction.

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

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?

The time period variable is based on the time value of money.

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

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