Question 1

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

Accepted Answer

A)  The amount of income from the transaction depends on which type of entity engaged in the transaction. 
B)  The transaction may be taxable or nontaxable depending on which type of entity engaged in the transaction. 
C)  The rate at which the income from the transaction is taxed depends on which type of entity engaged in the transaction. 
D)  The character of the income from the transaction depends on which type of entity engaged in the transaction. 
A)  The amount of income from the transaction depends on which type of entity engaged in the transaction. 
B)  The transaction may be taxable or nontaxable depending on which type of entity engaged in the transaction. 
C)  The rate at which the income from the transaction is taxed depends on which type of entity engaged in the transaction. 
D)  The character of the income from the transaction depends on which type of entity engaged in the transaction.

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

In 20Y1, Ms. Graves transferred appreciated property to KL Partnership in exchange for an ownership interest in the partnership. She deliberated waited until 20Y3 before taking cash out of the partnership. Ms. Graves may have been trying to prevent the IRS from applying the:

Accepted Answer

A)  Business purpose doctrine 
B)  Economic substance doctrine 
C)  Substance over form doctrine 
D)  Step transaction doctrine 
A)  Business purpose doctrine 
B)  Economic substance doctrine 
C)  Substance over form doctrine 
D)  Step transaction doctrine

Question 4

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 5

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' 25% 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 6

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

Accepted Answer

A)  Income characterized as capital gain can have no additional tax characteristics. 
B)  Individuals pay tax on their capital gains at a preferential rate. 
C)  Corporations pay tax on both ordinary income and capital gain at their regular rate. 
D)  Individuals pay tax on their capital gains at a preferential rate and corporations pay tax on both ordinary income and capital gain at their regular rate. 
A)  Income characterized as capital gain can have no additional tax characteristics. 
B)  Individuals pay tax on their capital gains at a preferential rate. 
C)  Corporations pay tax on both ordinary income and capital gain at their regular rate. 
D)  Individuals pay tax on their capital gains at a preferential rate and corporations pay tax on both ordinary income and capital gain at their regular rate.

Question 7

Which of the following statements about the entity variable is false?

Accepted Answer

A)  If Congress replaced the current progressive income tax rates with a proportionate rate applying to all taxpayers, the entity variable would no longer be a factor in tax planning. 
B)  The entity variable becomes more important when Congress increases the progressivity of the income tax. 
C)  Tax planning strategies based on the entity variable must involve at least two different taxpayers. 
D)  Tax planning strategies based on the entity variable must involve some type of income taxed at a preferential rate. 
A)  If Congress replaced the current progressive income tax rates with a proportionate rate applying to all taxpayers, the entity variable would no longer be a factor in tax planning. 
B)  The entity variable becomes more important when Congress increases the progressivity of the income tax. 
C)  Tax planning strategies based on the entity variable must involve at least two different taxpayers. 
D)  Tax planning strategies based on the entity variable must involve some type of income taxed at a preferential rate.

Question 8

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). 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.

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 9

Planning opportunities are created when the tax law applies differentially to alternative business transactions.

Accepted Answer

A) True 
 B)False

Question 10

Mrs. Jax 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 Mrs. Jax's 30% regular tax rate, the income from investment 2 would be taxed at a 20% preferential rate, and the income from investment 3 is tax-exempt. The investments offer the following before-tax yields. Investment 1: 8.25%
Investment 2: 7.5%
Investment 3: 6.0%
Which investment should Mrs. Jax select?

Accepted Answer

A)  Investment 1 
B)  Investment 2 
C)  Investment 3 
D)  Mrs. Jax is neutral between investment 2 and investment 3. 
A)  Investment 1 
B)  Investment 2 
C)  Investment 3 
D)  Mrs. Jax is neutral between investment 2 and investment 3.

Question 11

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). 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 two years later (year 2). Bailey's marginal tax rate is 25%, and it uses a 9% discount rate to compute NPV.

Accepted Answer

A)  $8,677 
B)  $9,014 
C)  $9,480 
D)  None of the above 
A)  $8,677 
B)  $9,014 
C)  $9,480 
D)  None of the above

Question 12

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:

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 13

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.

Accepted Answer

A) True 
 B)False

Question 14

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 15

Which of the following statements about tax deferral is true?

Accepted Answer

A)  The value of tax deferral increases as the taxpayer's discount rate for computing NPV decreases. 
B)  Tax deferral is not an effective planning strategy if the taxpayer's marginal tax rate is stable over time. 
C)  The greater the length of time that the payment of a tax is deferred, the less the tax costs in NPV terms. 
D)  Both A. and C. are true. 
A)  The value of tax deferral increases as the taxpayer's discount rate for computing NPV decreases. 
B)  Tax deferral is not an effective planning strategy if the taxpayer's marginal tax rate is stable over time. 
C)  The greater the length of time that the payment of a tax is deferred, the less the tax costs in NPV terms. 
D)  Both A. and C. are true.

Question 16

Assume that Congress recently amended the tax law to provide for a maximum 12% rate on interest income from U.S. savings bonds. Compute the tax savings from this preferential rate for:A. Mrs. Edwin saved $8.70 ($290 * [15% ordinary rate - 12% preferential rate]).A. Mrs. Edwin, who has a 15% marginal rate on ordinary income and earned $290 interest on her investment in U.S. savings bonds.B. Mr. Kalter saved $66.70 ($290 * [35% ordinary rate - 12% preferential rate]).B. Mr. Kalter, who has a 35% marginal rate on ordinary income and earned $290 interest on his investment in U.S. savings bonds.

Accepted Answer

A. Mrs. Edwin saved $8.70 ($29

Question 17

Which of the following statements is true?

Accepted Answer

A)  Mary Gilly owns 100% of the stock of Gilly Inc. Both Mary and Gilly Inc. are taxpayers under federal law. 
B)  The same rate schedule applies to both individual and corporate taxpayers. 
C)  The tax provisions governing the computation of individual business income are separate and distinct from the tax provisions governing the computation of corporate business income. 
D)  Mary Gilly owns 100% of the stock to Gilly Inc. Both Mary and Gilly Inc. are taxpayers under federal law and the tax provisions governing the computation of individual business income are separate and distinct from the tax provisions governing the computation of corporate business income. 
A)  Mary Gilly owns 100% of the stock of Gilly Inc. Both Mary and Gilly Inc. are taxpayers under federal law. 
B)  The same rate schedule applies to both individual and corporate taxpayers. 
C)  The tax provisions governing the computation of individual business income are separate and distinct from the tax provisions governing the computation of corporate business income. 
D)  Mary Gilly owns 100% of the stock to Gilly Inc. Both Mary and Gilly Inc. are taxpayers under federal law and the tax provisions governing the computation of individual business income are separate and distinct from the tax provisions governing the computation of corporate business income.

Question 18

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?

Accepted Answer

A)  CCC should engage in the transaction to generate $16,000 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 $16,000 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 19

Deduction-shifting transactions usually occur between unrelated taxpayers.

Accepted Answer

A) True 
 B)False

Question 20

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?

Accepted Answer

A)  NWR will pay the cash and report the deduction in 20Y1. 
B)  NWR will pay the cash and report the deduction in 20Y2. 
C)  NWR will pay the cash in 20Y2 and report the deduction in 20Y1. 
D)  NWR will pay the cash in 20Y1 and report the deduction in 20Y2. 
A)  NWR will pay the cash and report the deduction in 20Y1. 
B)  NWR will pay the cash and report the deduction in 20Y2. 
C)  NWR will pay the cash in 20Y2 and report the deduction in 20Y1. 
D)  NWR will pay the cash in 20Y1 and report the deduction in 20Y2.

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

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

In 20Y1, Ms. Graves transferred appreciated property to KL Partnership in exchange for an ownership interest in the partnership. She deliberated waited until 20Y3 before taking cash out of the partnership. Ms. Graves may have been trying to prevent the IRS from applying the:

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

Which of the following statements about the entity variable is false?

Planning opportunities are created when the tax law applies differentially to alternative business transactions.

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:

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.

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

Which of the following statements about tax deferral is true?

Which of the following statements is true?

Deduction-shifting transactions usually occur between unrelated taxpayers.

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?

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

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

In 20Y1, Ms. Graves transferred appreciated property to KL Partnership in exchange for an ownership interest in the partnership. She deliberated waited until 20Y3 before taking cash out of the partnership. Ms. Graves may have been trying to prevent the IRS from applying the:

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

Which of the following statements about the entity variable is false?

Planning opportunities are created when the tax law applies differentially to alternative business transactions.

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:

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.

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

Which of the following statements about tax deferral is true?

Which of the following statements is true?

Deduction-shifting transactions usually occur between unrelated taxpayers.

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?

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