Question 1

The arm's length transaction presumption is unreliable for transactions between related parties.

Accepted Answer

A) True 
 B)False

Question 2

Related party transactions occur in a public market.

Accepted Answer

A) True 
 B)False

Question 3

The IRS scrutinizes related party transactions more carefully than transactions occurring in a public market.

Accepted Answer

A) True 
 B)False

Question 4

Angela Jones is considering two investments. The first produces $5,000 of tax-exempt income. The second produces income that will be subject to tax at a rate of 15%. Which of the following statements is true regarding Angela's choice?

Accepted Answer

A)  Angela should always choose the first investment because it minimizes her tax costs. 
B)  If the second investment generates $5,500 of before-tax income, Angela should choose the first investment. 
C)  If the second investment generates $6,500 of before-tax income, Angela should choose the second investment. 
D)  Both B. and C. are true. 
A)  Angela should always choose the first investment because it minimizes her tax costs. 
B)  If the second investment generates $5,500 of before-tax income, Angela should choose the first investment. 
C)  If the second investment generates $6,500 of before-tax income, Angela should choose the second investment. 
D)  Both B. and C. are true.

Question 5

Private market transactions create an opportunity for bilateral tax planning.

Accepted Answer

A) True 
 B)False

Question 6

The tax cost of a transaction depends on the taxpayer's average tax rate for the year.

Accepted Answer

A) True 
 B)False

Question 7

Ms. Card bought an investment that will generate the following cash flows over a three-year period. $$\begin{array} { | l | c | c | c | } 
\hline & \text { Year } 0 & \text { Year } 1 & \text { Year Z } \
\hline \text { Taxeble revenue } & 42,000 & 56,000 & 80,000 \
\hline \text { Nantexaeble revenue } & 6,000 & 8,500 & 9,000 \
\hline \text { Deductible exaesese } & \text { (20,000) } & \text { (20,000) } & \text { (25,000) } \
\hline
\end{array}$$ If Ms. Card's marginal tax rate over the three year period is 40% and she uses a 6% discount rate, compute the NPV of the transaction.

Accepted Answer

A)  $94,129 
B)  $84,964 
C)  $62,373 
D)  None of the above 
A)  $94,129 
B)  $84,964 
C)  $62,373 
D)  None of the above

Question 8

Which of the following is not a related party transaction?

Accepted Answer

A)  Acme Corporation leases office space to Norton Company. Mr. and Mrs. Norton own Norton Company and 65% of Acme Corporation's stock. 
B)  BBD Inc. licenses a patent from Nugo Inc., which owns 82% of BBD's outstanding stock. 
C)  Beth Teal pays $15,000 a year to her gardener, Ben. Beth is Ben's grandmother. 
D)  All the transactions are between related parties. 
A)  Acme Corporation leases office space to Norton Company. Mr. and Mrs. Norton own Norton Company and 65% of Acme Corporation's stock. 
B)  BBD Inc. licenses a patent from Nugo Inc., which owns 82% of BBD's outstanding stock. 
C)  Beth Teal pays $15,000 a year to her gardener, Ben. Beth is Ben's grandmother. 
D)  All the transactions are between related parties.

Question 9

Mrs. Scott received a $12,000 cash payment. If her marginal tax rate is 40%, which of the following statements is true?

Accepted Answer

A)  If only $9,200 of the payment is taxable income, her after-tax cash flow is $9,200. 
B)  If the payment is not taxable income, her after-tax cash flow is $12,000. 
C)  If the payment is taxable income, her after-tax cash flow is $4,800. 
D)  None of the above is true. 
A)  If only $9,200 of the payment is taxable income, her after-tax cash flow is $9,200. 
B)  If the payment is not taxable income, her after-tax cash flow is $12,000. 
C)  If the payment is taxable income, her after-tax cash flow is $4,800. 
D)  None of the above is true.

Question 10

Omar Inc. paid a $24,000 expense, only $10,000 of which was deductible. Which of the following statements is false?

Accepted Answer

A)  If Omar's marginal tax rate is 10%, the after-tax cost of the expense is $9,000. 
B)  Regardless of Omar's marginal tax rate, the before-tax cost of the expense is $24,000. 
C)  If Omar's marginal tax rate is 30%, the after-tax cost of the expense is $21,000. 
D)  The after-tax cost of the expense depends on Omar's marginal tax rate. 
A)  If Omar's marginal tax rate is 10%, the after-tax cost of the expense is $9,000. 
B)  Regardless of Omar's marginal tax rate, the before-tax cost of the expense is $24,000. 
C)  If Omar's marginal tax rate is 30%, the after-tax cost of the expense is $21,000. 
D)  The after-tax cost of the expense depends on Omar's marginal tax rate.

Question 11

Mr. and Mrs. Bing purchased a business from Ms. Clark in an arm's length transaction. This transaction occurred in a private market.

Accepted Answer

A) True 
 B)False

Question 12

The tax cost of an income-generating transaction increases as the taxpayer's marginal tax rate increases.

Accepted Answer

A) True 
 B)False

Question 13

If Congress enacts a temporary change in the tax law that will apply for only two taxable years, the change increases:

Accepted Answer

A)  Market risk 
B)  Financial risk 
C)  Audit risk 
D)  Tax law uncertainty 
A)  Market risk 
B)  Financial risk 
C)  Audit risk 
D)  Tax law uncertainty

Question 14

If Congress enacts legislation late in the year that is retroactive to the beginning of the year, the legislation increases:

Accepted Answer

A)  Audit risk 
B)  Tax law uncertainty 
C)  Financial risk 
D)  Marginal tax rate uncertainty 
A)  Audit risk 
B)  Tax law uncertainty 
C)  Financial risk 
D)  Marginal tax rate uncertainty

Question 15

When the IRS audits a tax return, it is most likely to scrutinize the tax consequences of a/an:

Accepted Answer

A)  Related party transaction 
B)  Private market transaction 
C)  Public market transaction 
D)  Arm's length transaction 
A)  Related party transaction 
B)  Private market transaction 
C)  Public market transaction 
D)  Arm's length transaction

Question 16

Late in the current year, Jolsen Company signed a four-year contract with an advertising agency. Under the contract, Jolsen must pay $375,000 annually for the agency's services. After Jolsen signed the contract, Congress enacted legislation disallowing any deduction for advertising expense for future tax years. Jolsen underestimated the after-tax cost of the contract because of:

Accepted Answer

A)  Marginal tax rate uncertainty 
B)  Financial risk 
C)  Audit risk 
D)  Tax law uncertainty 
A)  Marginal tax rate uncertainty 
B)  Financial risk 
C)  Audit risk 
D)  Tax law uncertainty

Question 17

Rarke Company must choose between two alternate transactions. Transaction 1 requires a $20,000 nondeductible cash outlay, while transaction 2 requires a $25,000 deductible cash outlay. Determine the marginal tax rate at which the after-tax costs of the two transactions are equal.

Accepted Answer

A)  15% 
B)  20% 
C)  25% 
D)  30% 
A)  15% 
B)  20% 
C)  25% 
D)  30%

Question 18

Which of the following statements about marginal tax rates is true?

Accepted Answer

A)  A taxpayer's marginal rate can change with every transaction. 
B)  As the marginal rate increases, the tax cost of an income-generating transaction decreases. 
C)  As the marginal rate increases, the tax savings from a deduction increases. 
D)  Both a taxpayer's marginal rate can change with every transaction and, as the marginal rate increase, the tax savings from a deduction increases. 
A)  A taxpayer's marginal rate can change with every transaction. 
B)  As the marginal rate increases, the tax cost of an income-generating transaction decreases. 
C)  As the marginal rate increases, the tax savings from a deduction increases. 
D)  Both a taxpayer's marginal rate can change with every transaction and, as the marginal rate increase, the tax savings from a deduction increases.

Question 19

Which of the following statements about related party transactions is false?

Accepted Answer

A)  The transaction may lack the economic tension characteristic of a transaction between unrelated parties. 
B)  The transaction may reflect a fictitious market. 
C)  The parties to the transaction may have compatible financial objectives. 
D)  None of the above is false. 
A)  The transaction may lack the economic tension characteristic of a transaction between unrelated parties. 
B)  The transaction may reflect a fictitious market. 
C)  The parties to the transaction may have compatible financial objectives. 
D)  None of the above is false.

Question 20

Mr. and Mrs. Rath invested in a business that will generate the following cash flows over a three-year period. $$\begin{array} { | l | c | c | c | } 
\hline & \text { Year } 0 & \text { Year } 1 & \text { Year Z } \
\hline \text { Teyeble revenue } & 30,000 & 4 0 , 000 & 60,000 \
\hline \text { Deductible expenter } & ( 15,000 ) & ( 15,000 ) & \text { (20,000) } \
\hline
\end{array}$$ If the Raths' marginal tax rate over the three year period is 20% and they use a 6% discount rate, compute the NPV of the transaction.

Accepted Answer

A)  $59,340 
B)  $55,996 
C)  $50,413 
D)  None of the above 
A)  $59,340 
B)  $55,996 
C)  $50,413 
D)  None of the above

The arm's length transaction presumption is unreliable for transactions between related parties.

Related party transactions occur in a public market.

The IRS scrutinizes related party transactions more carefully than transactions occurring in a public market.

Angela Jones is considering two investments. The first produces $5,000 of tax-exempt income. The second produces income that will be subject to tax at a rate of 15%. Which of the following statements is true regarding Angela's choice?

Private market transactions create an opportunity for bilateral tax planning.

The tax cost of a transaction depends on the taxpayer's average tax rate for the year.

Which of the following is not a related party transaction?

Mrs. Scott received a $12,000 cash payment. If her marginal tax rate is 40%, which of the following statements is true?

Omar Inc. paid a $24,000 expense, only $10,000 of which was deductible. Which of the following statements is false?

Mr. and Mrs. Bing purchased a business from Ms. Clark in an arm's length transaction. This transaction occurred in a private market.

The tax cost of an income-generating transaction increases as the taxpayer's marginal tax rate increases.

If Congress enacts a temporary change in the tax law that will apply for only two taxable years, the change increases:

If Congress enacts legislation late in the year that is retroactive to the beginning of the year, the legislation increases:

When the IRS audits a tax return, it is most likely to scrutinize the tax consequences of a/an:

Rarke Company must choose between two alternate transactions. Transaction 1 requires a $20,000 nondeductible cash outlay, while transaction 2 requires a $25,000 deductible cash outlay. Determine the marginal tax rate at which the after-tax costs of the two transactions are equal.

Which of the following statements about marginal tax rates is true?

Which of the following statements about related party transactions is false?

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Maxims of Income Tax Planning

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 3: Taxes As Transaction Costs

The arm's length transaction presumption is unreliable for transactions between related parties.

Related party transactions occur in a public market.

The IRS scrutinizes related party transactions more carefully than transactions occurring in a public market.

Angela Jones is considering two investments. The first produces $5,000 of tax-exempt income. The second produces income that will be subject to tax at a rate of 15%. Which of the following statements is true regarding Angela's choice?

Private market transactions create an opportunity for bilateral tax planning.

The tax cost of a transaction depends on the taxpayer's average tax rate for the year.

Which of the following is not a related party transaction?

Mrs. Scott received a $12,000 cash payment. If her marginal tax rate is 40%, which of the following statements is true?

Omar Inc. paid a $24,000 expense, only $10,000 of which was deductible. Which of the following statements is false?

Mr. and Mrs. Bing purchased a business from Ms. Clark in an arm's length transaction. This transaction occurred in a private market.

The tax cost of an income-generating transaction increases as the taxpayer's marginal tax rate increases.

If Congress enacts a temporary change in the tax law that will apply for only two taxable years, the change increases:

If Congress enacts legislation late in the year that is retroactive to the beginning of the year, the legislation increases:

When the IRS audits a tax return, it is most likely to scrutinize the tax consequences of a/an:

Rarke Company must choose between two alternate transactions. Transaction 1 requires a $20,000 nondeductible cash outlay, while transaction 2 requires a $25,000 deductible cash outlay. Determine the marginal tax rate at which the after-tax costs of the two transactions are equal.

Which of the following statements about marginal tax rates is true?

Which of the following statements about related party transactions is false?

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Maxims of Income Tax Planning

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