Question 1

Which of the following is needed to implement the income shifting strategy?

Accepted Answer

A)  taxpayers with varying tax rates 
B)  decreasing tax rates 
C)  increasing tax rates 
D)  unrelated taxpayers 
E)  None of these 
A)  taxpayers with varying tax rates 
B)  decreasing tax rates 
C)  increasing tax rates 
D)  unrelated taxpayers 
E)  None of these

Question 2

Which of the following is more likely to receive IRS scrutiny under the assignment of income doctrine?

Accepted Answer

A)  A corporation paying its shareholders a $20,000 dividend 
B)  A parent employing her child in the family business 
C)  A taxpayer gifting stock to his children 
D)  A cash-basis business delaying billing its customers until after year end 
E)  None of these 
A)  A corporation paying its shareholders a $20,000 dividend 
B)  A parent employing her child in the family business 
C)  A taxpayer gifting stock to his children 
D)  A cash-basis business delaying billing its customers until after year end 
E)  None of these

Question 3

Which of the following does not limit the benefits of deferring income?

Accepted Answer

A)  increasing tax rates 
B)  a taxpayer with severe cash flow needs 
C)  if continuing an investment would generate a low rate of return 
D)  if continuing an investment would subject the taxpayer to unnecessary risk 
E)  None of these 
A)  increasing tax rates 
B)  a taxpayer with severe cash flow needs 
C)  if continuing an investment would generate a low rate of return 
D)  if continuing an investment would subject the taxpayer to unnecessary risk 
E)  None of these

Question 4

The goal of tax planning generally is to:

Accepted Answer

A)  Minimize taxes 
B)  Minimize IRS scrutiny 
C)  Maximize after-tax wealth 
D)  Support the Federal government 
E)  None of these 
A)  Minimize taxes 
B)  Minimize IRS scrutiny 
C)  Maximize after-tax wealth 
D)  Support the Federal government 
E)  None of these

Question 5

When considering cash inflows, higher present values are preferred.

Accepted Answer

A) True 
 B)False

Question 6

Luther was very excited to hear about the potential tax savings from shifting income from his corporation to him. The next day he had his corporation declare a $30,000 dividend to him. Is this an effective income shifting strategy? If so, why? If not, why not? What recommendations do you have for Luther?

Accepted Answer

Because corporations do not get a tax de

Question 7

Rob is currently considering investing in municipal bonds that earn 4% interest or taxable bonds issued by Dell Computer that pay 6.5%. If Rob's tax rate is 20%, which bond should he choose? Which bond should he choose if his tax rate is 30%? At what tax rate would he be indifferent to the municipal bond or to the corporate bond? What strategy is this decision based upon?

Accepted Answer

Rob's after tax rate of return on the ta

Question 8

The assignment of income doctrine is a natural limitation to the timing strategy.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is an example of the timing strategy?

Accepted Answer

A)  A cash basis taxpayer paying all outstanding bills by year end 
B)  A parent employing her child in the family business 
C)  A business paying its owner a $30,000 salary 
D)  A taxpayer investing in a tax preferred investment 
E)  None of these 
A)  A cash basis taxpayer paying all outstanding bills by year end 
B)  A parent employing her child in the family business 
C)  A business paying its owner a $30,000 salary 
D)  A taxpayer investing in a tax preferred investment 
E)  None of these

Question 10

The timing strategy becomes more attractive as tax rates decrease.

Accepted Answer

A) True 
 B)False

Question 11

Tax avoidance is a legal activity that forms the basis of the basic tax planning strategies discussed in class.

Accepted Answer

A) True 
 B)False

Question 12

The goal of tax planning is tax minimization.

Accepted Answer

A) True 
 B)False

Question 13

If Lucy earns a 6% after-tax rate of return, $8,000 received in four years is worth how much today?

Accepted Answer

A)  $8,000 
B)  $7,544 
C)  $8,989 
D)  $6,336 
E)  None of these 
A)  $8,000 
B)  $7,544 
C)  $8,989 
D)  $6,336 
E)  None of these

Question 14

Which of the following does not limit the income shifting strategy?

Accepted Answer

A)  assignment of income doctrine 
B)  business purpose doctrine 
C)  substance-over-form doctrine 
D)  step-transaction doctrine 
E)  None of these 
A)  assignment of income doctrine 
B)  business purpose doctrine 
C)  substance-over-form doctrine 
D)  step-transaction doctrine 
E)  None of these

Question 15

Virtually every transaction involves the taxpayer and two other parties that have an interest in the tax ramifications of the transaction.

Accepted Answer

A) True 
 B)False

Question 16

A taxpayer paying his 10 year old daughter $50,000 a year for consulting likely violates which doctrine?

Accepted Answer

A)  constructive receipt doctrine 
B)  implicit tax doctrine 
C)  substance-over-form doctrine 
D)  step-transaction doctrine 
E)  None of these 
A)  constructive receipt doctrine 
B)  implicit tax doctrine 
C)  substance-over-form doctrine 
D)  step-transaction doctrine 
E)  None of these

Question 17

If tax rates will be lower next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.

Accepted Answer

A) True 
 B)False

Question 18

O'Reilly is a masterful lottery player. The megamillion jackpot is now up to $200 million. If O'Reilly wins the jackpot, he has a choice of receiving $200 million in 5 years or a smaller lump sum currently. Advise O'Reilly on his choice under the following scenarios. Which option should he take and why?
a. O'Reilly's after tax return is 10%. If he chooses the current lump sum option, the lottery will pay him $130 million.
b. O'Reilly's after-tax return is 10%. His current tax rate will be 35% if he receives the lottery payment now. His expected tax rate in five years will be 40%. If he chooses the current lump sum option, the lottery will pay him $100 million.

Accepted Answer

(a) If O'Reilly takes the current lump s

Question 19

Maurice is currently considering investing in a high dividend yield stock with no growth potential that pays a 6% dividend yield or bonds issued by The Coca Cola Company that pay 8%. If Maurice's ordinary tax rate is 25% and his dividend tax rate is 15%, which investment should he choose? Which investment should he choose if his ordinary tax rate is 30%? At what ordinary tax rate would he be indifferent to the stock or to the bond? What strategy is this decision based upon?

Accepted Answer

Maurice's after tax rate of return on th

Question 20

The constructive receipt doctrine is a natural limitation for the conversion strategy.

Accepted Answer

A) True 
 B)False

Which of the following is needed to implement the income shifting strategy?

Which of the following is more likely to receive IRS scrutiny under the assignment of income doctrine?

Which of the following does not limit the benefits of deferring income?

The goal of tax planning generally is to:

When considering cash inflows, higher present values are preferred.

The assignment of income doctrine is a natural limitation to the timing strategy.

Which of the following is an example of the timing strategy?

The timing strategy becomes more attractive as tax rates decrease.

Tax avoidance is a legal activity that forms the basis of the basic tax planning strategies discussed in class.

The goal of tax planning is tax minimization.

If Lucy earns a 6% after-tax rate of return, $8,000 received in four years is worth how much today?

Which of the following does not limit the income shifting strategy?

Virtually every transaction involves the taxpayer and two other parties that have an interest in the tax ramifications of the transaction.

A taxpayer paying his 10 year old daughter $50,000 a year for consulting likely violates which doctrine?

If tax rates will be lower next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.

The constructive receipt doctrine is a natural limitation for the conversion strategy.

An Introduction to Tax

Tax Compliance, the Irs, and Tax Authorities

Individual Income Tax Overview, Exemptions, and Filing Status

Gross Income and Exclusions

Individual Deductions

Individual Income Tax Computation and Tax Credits

Business Income, Deductions, and Accounting Methods

Property Acquisition and Cost Recovery

Property Dispositions

Investments

Compensation

Retirement Savings and Deferred Compensation

Tax Consequences of Home Ownership

Filters

Exam 3: Tax Planning Strategies and Related Limitations

Which of the following is needed to implement the income shifting strategy?

Which of the following is more likely to receive IRS scrutiny under the assignment of income doctrine?

Which of the following does not limit the benefits of deferring income?

The goal of tax planning generally is to:

When considering cash inflows, higher present values are preferred.

The assignment of income doctrine is a natural limitation to the timing strategy.

Which of the following is an example of the timing strategy?

The timing strategy becomes more attractive as tax rates decrease.

Tax avoidance is a legal activity that forms the basis of the basic tax planning strategies discussed in class.

The goal of tax planning is tax minimization.

If Lucy earns a 6% after-tax rate of return, $8,000 received in four years is worth how much today?

Which of the following does not limit the income shifting strategy?

Virtually every transaction involves the taxpayer and two other parties that have an interest in the tax ramifications of the transaction.

A taxpayer paying his 10 year old daughter $50,000 a year for consulting likely violates which doctrine?

If tax rates will be lower next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.

The constructive receipt doctrine is a natural limitation for the conversion strategy.

An Introduction to Tax

Tax Compliance, the Irs, and Tax Authorities

Individual Income Tax Overview, Exemptions, and Filing Status

Gross Income and Exclusions

Individual Deductions

Individual Income Tax Computation and Tax Credits

Business Income, Deductions, and Accounting Methods

Property Acquisition and Cost Recovery

Property Dispositions

Investments

Compensation

Retirement Savings and Deferred Compensation

Tax Consequences of Home Ownership

Filters