Question 1

The tax law applies uniformly to every commercial transaction by every business entity.

Accepted Answer

A) True 
 B)False

Question 2

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 3

The substance over form doctrine allows the IRS to look through the legal formalities of a transaction to determine its true economic nature.

Accepted Answer

A) True 
 B)False

Question 4

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?

Accepted Answer

A)  If Varson's marginal tax rate is higher than Vonsell's marginal tax rate, Vonsell should purchase the advertising to minimize after-tax cost. 
B)  If Varson's marginal tax rate is higher than Vonsell's marginal tax rate, the tax law requires Vonsell to purchase the advertising. 
C)  If Varson's marginal tax rate is higher than Vonsell's marginal tax rate, Varson can claim a $150,000 deduction on its tax return regardless of which corporation purchases the advertising. 
D)  None of the above is true. 
A)  If Varson's marginal tax rate is higher than Vonsell's marginal tax rate, Vonsell should purchase the advertising to minimize after-tax cost. 
B)  If Varson's marginal tax rate is higher than Vonsell's marginal tax rate, the tax law requires Vonsell to purchase the advertising. 
C)  If Varson's marginal tax rate is higher than Vonsell's marginal tax rate, Varson can claim a $150,000 deduction on its tax return regardless of which corporation purchases the advertising. 
D)  None of the above is true.

Question 5

Mrs. Day structures a transaction to shift income from her 20Y1 tax year to her 20Y2 tax year. 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 6

Corporations, LLCs, and partnerships are all taxable entities.

Accepted Answer

A) True 
 B)False

Question 7

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.

Accepted Answer

A)  $6,276 
B)  $8,933 
C)  $9,130 
D)  None of the above 
A)  $6,276 
B)  $8,933 
C)  $9,130 
D)  None of the above

Question 8

Mr. Coomb structured a transfer of real estate to his daughter as a sale. Upon audit, the IRS agent analyzed the economic consequences of the transfer and treated it as a gift by applying the:

Accepted Answer

A)  Business purpose doctrine 
B)  Substance over form doctrine 
C)  Assignment of income doctrine 
D)  Step transaction doctrine 
A)  Business purpose doctrine 
B)  Substance over form doctrine 
C)  Assignment of income doctrine 
D)  Step transaction doctrine

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Mrs. James plans to invest in one of two investment alternatives having the same risk. Investment 1 has a before-tax return of 10% and the income from investment 1 would be taxed at Mrs. James' 35% regular tax rate. Investment 2 has a before-tax return of 8% and the income from investment 2 would be taxed at a 15% preferential rate. Which of the following statements regarding these investment choices is false?

Accepted Answer

A)  The after-tax rate of return on investment 1 is 6.5%. 
B)  The after-tax rate of return on investment 2 is 6.8%. 
C)  Investment 2 bears implicit tax relative to investment 1. 
D)  Mrs. James should choose investment 1. 
A)  The after-tax rate of return on investment 1 is 6.5%. 
B)  The after-tax rate of return on investment 2 is 6.8%. 
C)  Investment 2 bears implicit tax relative to investment 1. 
D)  Mrs. James should choose investment 1.

Question 11

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

Accepted Answer

A)  Mr. Bob Clark, a U.S. citizen and resident of West Virginia 
B)  PTS Limited, an Arizona partnership 
C)  Confad Inc., an Oklahoma corporation listed on Nasdaq 
D)  All of the above are taxable entities. 
A)  Mr. Bob Clark, a U.S. citizen and resident of West Virginia 
B)  PTS Limited, an Arizona partnership 
C)  Confad Inc., an Oklahoma corporation listed on Nasdaq 
D)  All of the above are taxable entities.

Question 12

The business purpose doctrine allows the IRS to collapse a series of intermediate transactions into a single transaction to determine the tax consequences of the arrangement in its entirety.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements about the time period variable is false?

Accepted Answer

A)  If Congress replaced the current progressive income tax rates with a proportionate rate applying to all taxpayers, the time period variable would no longer be a factor in tax planning. 
B)  The time period variable becomes more important as the taxpayer's discount rate for computing NPV increases. 
C)  Tax planning strategies based on the time period variable must involve at least two different taxable years. 
D)  Tax planning strategies based on the time period variable reflect the time value of money. 
A)  If Congress replaced the current progressive income tax rates with a proportionate rate applying to all taxpayers, the time period variable would no longer be a factor in tax planning. 
B)  The time period variable becomes more important as the taxpayer's discount rate for computing NPV increases. 
C)  Tax planning strategies based on the time period variable must involve at least two different taxable years. 
D)  Tax planning strategies based on the time period variable reflect the time value of money.

Question 14

JNC Company structured an income-generating transaction so that the income and cash flow shifted to Juno Inc. Presuming that JNC makes rational decisions, which of the following statements is false?

Accepted Answer

A)  JNC and Juno must be related parties that share a mutual economic interest. 
B)  JNC's marginal tax rate is higher than Juno's marginal tax rate. 
C)  The income shift should increase the NPV of the transaction. 
D)  None of the above is false. 
A)  JNC and Juno must be related parties that share a mutual economic interest. 
B)  JNC's marginal tax rate is higher than Juno's marginal tax rate. 
C)  The income shift should increase the NPV of the transaction. 
D)  None of the above is false.

Question 15

Tatun Inc. pays state income tax at a 5% rate and federal income tax at a 34% rate. Tatun recently engaged in a transaction in Mexico, which levied a $25,200 income tax on the transaction. Tatun's pretax net income for the current year is $1,913,900. Compute Tatun's total income tax burden assuming that:
A. Tatun's state tax is $95,695 ($1,913,900 * 5%), and its federal tax is $618,190 ([$1,913,900 - $95,695 deduction for state tax] * 34%). Tatun's total income tax burden is $739,085 ($95,695 state tax + $618,190 federal tax + $25,200 Mexican tax).
A. The Mexican tax is nondeductible for state and federal tax purposes.
B. Tatun's state tax is $94,435 ([$1,913,900 - $25,200 deduction for Mexican tax] * 5%), and its federal tax is $610,050 ([$1,913,900 - $94,435 deduction for state tax - $25,200 deduction for Mexican tax] * 34%). Tatun's total income tax burden is $729,685 ($94,435 state tax + $610,050 federal tax + $25,200 Mexican tax).
B. The Mexican tax is deductible for state and federal tax purposes.

Accepted Answer

A. Tatun's state tax is $95,695 ($1,913,

Question 16

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)  Statements A. and C. are true. 
E)  are true. 
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)  Statements A. and C. are true. 
E)  are true.

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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)  Statements B. and C. are true. 
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)  Statements B. and C. are true.

Question 20

The 15% preferential tax rate on capital gains has the same value to every individual taxpayer.

Accepted Answer

A) True 
 B)False

The tax law applies uniformly to every commercial transaction by every business 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:

The substance over form doctrine allows the IRS to look through the legal formalities of a transaction to determine its true economic nature.

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?

Mrs. Day structures a transaction to shift income from her 20Y1 tax year to her 20Y2 tax year. This tax planning strategy may be taking advantage of the:

Corporations, LLCs, and partnerships are all taxable entities.

Mr. Coomb structured a transfer of real estate to his daughter as a sale. Upon audit, the IRS agent analyzed the economic consequences of the transfer and treated it as a gift by applying the:

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?

The business purpose doctrine allows the IRS to collapse a series of intermediate transactions into a single transaction to determine the tax consequences of the arrangement in its entirety.

Which of the following statements about the time period variable is false?

JNC Company structured an income-generating transaction so that the income and cash flow shifted to Juno Inc. Presuming that JNC makes rational decisions, which of the following statements is false?

Which of the following statements is true?

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

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 ordinary income and capital gain is true?

The 15% preferential tax rate on capital gains has the same value to every individual taxpayer.

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 tax law applies uniformly to every commercial transaction by every business 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:

The substance over form doctrine allows the IRS to look through the legal formalities of a transaction to determine its true economic nature.

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?

Mrs. Day structures a transaction to shift income from her 20Y1 tax year to her 20Y2 tax year. This tax planning strategy may be taking advantage of the:

Corporations, LLCs, and partnerships are all taxable entities.

Mr. Coomb structured a transfer of real estate to his daughter as a sale. Upon audit, the IRS agent analyzed the economic consequences of the transfer and treated it as a gift by applying the:

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?

The business purpose doctrine allows the IRS to collapse a series of intermediate transactions into a single transaction to determine the tax consequences of the arrangement in its entirety.

Which of the following statements about the time period variable is false?

JNC Company structured an income-generating transaction so that the income and cash flow shifted to Juno Inc. Presuming that JNC makes rational decisions, which of the following statements is false?

Which of the following statements is true?

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

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 ordinary income and capital gain is true?

The 15% preferential tax rate on capital gains has the same value to every individual taxpayer.

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