Question 1

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

Accepted Answer

A)  The tax character of income is determined strictly by tax law. 
B)  The tax character of income cannot change from year to year. 
C)  Tax planning strategies based on the character variable must involve at least two different taxpayers. 
D)  Statements B. and C. are true. 
A)  The tax character of income is determined strictly by tax law. 
B)  The tax character of income cannot change from year to year. 
C)  Tax planning strategies based on the character variable must involve at least two different taxpayers. 
D)  Statements B. and C. are true.

Question 2

Understal Company has $750,000 to invest and two competing investment opportunities. Investment 1 would pay 9% per year ($67,500 annual before-tax cash flow). Investment 2 would pay 7% per year ($52,500 annual before-tax cash flow). The return on Investment 1 is taxable at Understal's 35% rate on ordinary income, while the return on Investment 2 is taxable at a 20% preferential rate.
A. Compute the explicit and implicit tax that Understal would pay with respect to each investment.
A. Understal would pay $23,625 explicit tax ($67,500 * 35%) and no implicit tax on Investment 1. It would pay $10,500 explicit tax ($52,500 * 20%) and $15,000 implicit tax (reduction in before-tax yield) on Investment 2.
B. Investment 1 results in $43,875 after-tax cash flow, while Investment 2 results in $42,000 after-tax cash flow.
B. Which investment results in the greater after-tax cash flow?

Accepted Answer

A. Understal would pay $23,625 explicit

Question 3

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 4

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 5

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?

Accepted Answer

A)  The family could save 23 cents of tax for every dollar of deduction shifted from Jeff to Mrs. Bern. 
B)  The family could save 23 cents of tax for every dollar of income shifted from Mrs. Bern to Jeff. 
C)  Any income shift from Mrs. Bern to Jeff is constrained by the assignment of income doctrine. 
D)  None of the above is false. 
A)  The family could save 23 cents of tax for every dollar of deduction shifted from Jeff to Mrs. Bern. 
B)  The family could save 23 cents of tax for every dollar of income shifted from Mrs. Bern to Jeff. 
C)  Any income shift from Mrs. Bern to Jeff is constrained by the assignment of income doctrine. 
D)  None of the above is false.

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

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 8

Hilex Inc. structures a transaction to shift income from its California office to its Oregon office. This tax planning strategy may be taking advantage of the:

Accepted Answer

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

Question 9

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 10

Mr. Blau structured an income-generating transaction so that the $90,000 income and cash flow shifted to Mr. Blau's sister, Kim. If Mr. Blau's marginal tax rate is 35%, and Kim's tax rate is 15%, compute the tax savings from the income shift.

Accepted Answer

A)  $13,500 
B)  $21,500 
C)  $31,500 
D)  None of the above 
A)  $13,500 
B)  $21,500 
C)  $31,500 
D)  None of the above

Question 11

Mr. Cox has the choice between two transactions. Transaction A will generate $500,000 taxable cash flow in the current year (year 0). Transaction B will generate $460,000 cash flow in the current year, but Mr. Cox will not be required to report $460,000 income until next year (year 1). Mr. Cox has a 40% marginal tax rate and uses a 10% discount rate to compute NPV. Which of the following statements is true?

Accepted Answer

A)  Mr. Cox should choose transaction A because it generates more before-tax cash flow. 
B)  Mr. Cox should choose transaction A because its NPV exceeds transaction B's NPV. 
C)  Mr. Cox should choose transaction B because the tax cost is deferred one year. 
D)  Mr. Cox should choose transaction B because its NPV exceeds transaction A's NPV. 
A)  Mr. Cox should choose transaction A because it generates more before-tax cash flow. 
B)  Mr. Cox should choose transaction A because its NPV exceeds transaction B's NPV. 
C)  Mr. Cox should choose transaction B because the tax cost is deferred one year. 
D)  Mr. Cox should choose transaction B because its NPV exceeds transaction A's NPV.

Question 12

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 13

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 14

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 15

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 16

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 17

Hilex Inc. structures a transaction to shift income from its 20Y0 tax year to its 20Y2 tax year. This tax planning strategy may be taking advantage of the:

Accepted Answer

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

Question 18

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:

Accepted Answer

A)  Economic substance doctrine 
B)  Assignment of income doctrine 
C)  Step transaction doctrine 
D)  Constructive payment doctrine 
A)  Economic substance doctrine 
B)  Assignment of income doctrine 
C)  Step transaction doctrine 
D)  Constructive payment doctrine

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements about tax planning is false?

Accepted Answer

A)  The goal of tax planning is tax minimization. 
B)  Tax planning involves structuring transactions to reduce tax costs or increase tax savings. 
C)  Sound tax planning ideas should be entirely legal. 
D)  None of the above is false. 
A)  The goal of tax planning is tax minimization. 
B)  Tax planning involves structuring transactions to reduce tax costs or increase tax savings. 
C)  Sound tax planning ideas should be entirely legal. 
D)  None of the above is false.

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

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.

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.

Hilex Inc. structures a transaction to shift income from its California office to its Oregon office. This tax planning strategy may be taking advantage of 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.

Mr. Blau structured an income-generating transaction so that the $90,000 income and cash flow shifted to Mr. Blau's sister, Kim. If Mr. Blau's marginal tax rate is 35%, and Kim's tax rate is 15%, compute the tax savings from the income shift.

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

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

Hilex Inc. structures a transaction to shift income from its 20Y0 tax year to its 20Y2 tax year. This tax planning strategy may be taking advantage of the:

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:

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

Which of the following statements about tax planning is false?

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

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

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.

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.

Hilex Inc. structures a transaction to shift income from its California office to its Oregon office. This tax planning strategy may be taking advantage of 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.

Mr. Blau structured an income-generating transaction so that the $90,000 income and cash flow shifted to Mr. Blau's sister, Kim. If Mr. Blau's marginal tax rate is 35%, and Kim's tax rate is 15%, compute the tax savings from the income shift.

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

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

Hilex Inc. structures a transaction to shift income from its 20Y0 tax year to its 20Y2 tax year. This tax planning strategy may be taking advantage of the:

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:

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

Which of the following statements about tax planning is false?

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