Exam 4: Maxims of Income Tax Planning

Nilo Inc. sold an asset to PPQ Partnership, which is unrelated to Nilo. PPQ immediately sold the property to Nilo Western Inc., which is a 100% controlled Nilo subsidiary. The IRS could treat the two sales as one sale of the asset by Nilo to Nilo Western by applying the:

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:

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

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). 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.

Mrs. Bern's marginal tax rate is 33%, and her grandson Jeff's marginal tax rate is 10%. Which of the following statement is false?

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

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

Which of the following statements about tax strategies is false?

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 tax character of an item of income depends on how the income is reported on the firm's financial statements.

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

Which of the following statements about the jurisdiction variable is true?

Varson Inc. and Vonsell Inc. are owned by the same family. The family decides to purchase $150,000 of deductible advertising that will benefit the businesses operated by both corporations. Which of the following statements is true?

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

The entity variable is important because the amount of taxable income generated by a business depends on the type of entity conducting the business.

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 reduced market rate of return on a tax-favored investment is called an implicit tax.

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

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. Which of the following statements is true?

Tax evasion is a federal crime punishable by imprisonment.