Question 1

The assignment of income doctrine constraints tax deferral strategies.

Accepted Answer

A) True 
 B)False  False

Question 2

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?

Accepted Answer

A)  The after-tax rate of return on investment 1 is 6.5%. 
B)  The after-tax rate of return on investment 2 is 6.8%. 
C)  Investment 2 bears implicit tax relative to investment 1. 
D)  Mrs. James should choose investment 1. 
A)  The after-tax rate of return on investment 1 is 6.5%. 
B)  The after-tax rate of return on investment 2 is 6.8%. 
C)  Investment 2 bears implicit tax relative to investment 1. 
D)  Mrs. James should choose investment 1. D

Question 3

Corporations, LLCs, and partnerships are all taxable entities.

Accepted Answer

A) True 
 B)False  False

Question 4

The after-tax value of a dollar of income to a high-tax entity is more than the after-tax value to a low-tax entity.

Accepted Answer

A) True 
 B)False

Question 5

The assignment of income doctrine holds that:

Accepted Answer

A)  Income from a transaction must be taxed to the person who receives the cash from the transaction. 
B)  Income from a transaction must be taxed to the person who reports the transaction on his or her tax return. 
C)  Income from a transaction must be taxed to the person that earns the income. 
D)  None of the above 
A)  Income from a transaction must be taxed to the person who receives the cash from the transaction. 
B)  Income from a transaction must be taxed to the person who reports the transaction on his or her tax return. 
C)  Income from a transaction must be taxed to the person that earns the income. 
D)  None of the above

Question 6

Hilex Inc. structures a transaction to shift income from one controlled subsidiary to another controlled subsidiary. This tax planning strategy may be taking advantage of the:

Accepted Answer

A)  Jurisdiction variable 
B)  Time period variable 
C)  Entity variable 
D)  Character variable 
A)  Jurisdiction variable 
B)  Time period variable 
C)  Entity variable 
D)  Character variable

Question 7

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

Accepted Answer

A)  Tax avoidance is legal, while tax evasion is illegal. 
B)  The difference between avoidance and evasion is clearly defined in the tax law. 
C)  Tax evasion is a federal felony offence. 
D)  Taxpayers should not regard tax avoidance as unethical. 
A)  Tax avoidance is legal, while tax evasion is illegal. 
B)  The difference between avoidance and evasion is clearly defined in the tax law. 
C)  Tax evasion is a federal felony offence. 
D)  Taxpayers should not regard tax avoidance as unethical.

Question 8

Mr. Dole needed to sell appreciated stock out of his investment portfolio to generate cash to pay for his Christmas spending. He decided to postpone the sale from December 20Y1 until January 20Y2. Mr. Dole is 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 9

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). 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.

Accepted Answer

A)  $3,654 
B)  $5,318 
C)  $8,526 
D)  None of the above 
A)  $3,654 
B)  $5,318 
C)  $8,526 
D)  None of the above

Question 10

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?

Accepted Answer

A)  Because OWB and Owin are owned by the same family, the family is indifferent as to which corporation engages in the transaction. 
B)  OWB should engage in the transaction to generate $7,500 more after-tax cash flow. 
C)  OWB should engage in the transaction to avoid the extra expense. 
D)  Owin should engage in the transaction because it has the lower marginal tax rate. 
A)  Because OWB and Owin are owned by the same family, the family is indifferent as to which corporation engages in the transaction. 
B)  OWB should engage in the transaction to generate $7,500 more after-tax cash flow. 
C)  OWB should engage in the transaction to avoid the extra expense. 
D)  Owin should engage in the transaction because it has the lower marginal tax rate.

Question 11

Tatun Inc. pays state income tax at a 5% rate and federal income tax at a 34% rate. Tatun recently engaged in a transaction in Mexico, which levied a $25,200 income tax on the transaction. Tatun's pretax net income for the current year is $1,913,900. Compute Tatun's total income tax burden assuming that:A. Tatun's state tax is $95,695 ($1,913,900 * 5%), and its federal tax is $618,190 ([$1,913,900 - $95,695 deduction for state tax] * 34%). Tatun's total income tax burden is $739,085 ($95,695 state tax + $618,190 federal tax + $25,200 Mexican tax).A. The Mexican tax is nondeductible for state and federal tax purposes.B. Tatun's state tax is $94,435 ([$1,913,900 - $25,200 deduction for Mexican tax] * 5%), and its federal tax is $610,050 ([$1,913,900 - $94,435 deduction for state tax - $25,200 deduction for Mexican tax] * 34%). Tatun's total income tax burden is $729,685 ($94,435 state tax + $610,050 federal tax + $25,200 Mexican tax).B. The Mexican tax is deductible for state and federal tax purposes.

Accepted Answer

A. Tatun's state tax is $95,695 ($1,913,

Question 12

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 13

Elton Company plans to build a new facility to manufacture backpacks. Elton sells its backpacks across the country for $300 per pack. It could locate the plan in state A, which levies a 5 percent tax on business income. The estimated manufacturing cost per pack in state A would be $120. Alternatively, Elton could locate the plan in state B, which levies a 3 percent tax on business income. The estimated manufacturing cost in state B is $126 per pack. In which state should Elton locate its plant? Provide calculations to support your conclusion.

Accepted Answer

Before-tax profit per pack in state A is

Question 14

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 40%, and PTB's tax rate is 15%, compute the tax savings from the income shift.

Accepted Answer

A)  $300,000 
B)  $250,000 
C)  $187,500 
D)  $112,500 
A)  $300,000 
B)  $250,000 
C)  $187,500 
D)  $112,500

Question 15

The time period variable reflects the fact that:

Accepted Answer

A)  Federal income tax rules are not stable over time. 
B)  A tax dollar paid this year cost more than a tax dollar paid in a future year. 
C)  A taxpayer's marginal rate next year may be more or less than the current marginal rate. 
D)  None of the above 
A)  Federal income tax rules are not stable over time. 
B)  A tax dollar paid this year cost more than a tax dollar paid in a future year. 
C)  A taxpayer's marginal rate next year may be more or less than the current marginal rate. 
D)  None of the above

Question 16

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 17

Mrs. Stout has a $35,000 capital gain eligible for a 28% preferential tax rate. Which of the following statements is false?

Accepted Answer

A)  If Mrs. Stout's regular marginal tax rate is 15%, she can elect to recharacterize the capital gain as ordinary income. 
B)  If Mrs. Stout's regular marginal tax rate is 25%, the preferential tax rate has no value to her. 
C)  If Mrs. Stout's regular marginal tax rate is 35%, the preferential tax rate saves her $2,450 in tax. 
D)  None of the above is false. 
A)  If Mrs. Stout's regular marginal tax rate is 15%, she can elect to recharacterize the capital gain as ordinary income. 
B)  If Mrs. Stout's regular marginal tax rate is 25%, the preferential tax rate has no value to her. 
C)  If Mrs. Stout's regular marginal tax rate is 35%, the preferential tax rate saves her $2,450 in tax. 
D)  None of the above is false.

Question 18

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 30% 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?

Accepted Answer

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

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

The 15% preferential tax rate on capital gains has the same value to every individual taxpayer.

Accepted Answer

A) True 
 B)False

The assignment of income doctrine constraints tax deferral strategies.

Corporations, LLCs, and partnerships are all taxable entities.

The after-tax value of a dollar of income to a high-tax entity is more than the after-tax value to a low-tax entity.

The assignment of income doctrine holds that:

Hilex Inc. structures a transaction to shift income from one controlled subsidiary to another controlled subsidiary. This tax planning strategy may be taking advantage of the:

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

Mr. Dole needed to sell appreciated stock out of his investment portfolio to generate cash to pay for his Christmas spending. He decided to postpone the sale from December 20Y1 until January 20Y2. Mr. Dole is taking advantage of the:

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:

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 40%, and PTB's tax rate is 15%, compute the tax savings from the income shift.

The time period variable reflects the fact that:

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

Mrs. Stout has a $35,000 capital gain eligible for a 28% preferential tax rate. Which of the following statements is false?

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

The 15% preferential tax rate on capital gains has the same value to every individual taxpayer.

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, Partnerships, Llcs, and S Corporations

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

The assignment of income doctrine constraints tax deferral strategies.

Corporations, LLCs, and partnerships are all taxable entities.

The after-tax value of a dollar of income to a high-tax entity is more than the after-tax value to a low-tax entity.

The assignment of income doctrine holds that:

Hilex Inc. structures a transaction to shift income from one controlled subsidiary to another controlled subsidiary. This tax planning strategy may be taking advantage of the:

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

Mr. Dole needed to sell appreciated stock out of his investment portfolio to generate cash to pay for his Christmas spending. He decided to postpone the sale from December 20Y1 until January 20Y2. Mr. Dole is taking advantage of the:

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:

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 40%, and PTB's tax rate is 15%, compute the tax savings from the income shift.

The time period variable reflects the fact that:

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

Mrs. Stout has a $35,000 capital gain eligible for a 28% preferential tax rate. Which of the following statements is false?

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

The 15% preferential tax rate on capital gains has the same value to every individual taxpayer.

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, Partnerships, Llcs, and S Corporations

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