Question 1

The after-tax cost of a dollar of deductible expense to a high-tax entity is less than the after-tax cost to a low-tax entity.

Accepted Answer

A) True 
 B)False

Question 2

The time period variable is based on the time value of money.

Accepted Answer

A) True 
 B)False

Question 3

Hilex Inc. structures a transaction to shift income from one controlled subsidiary to another controlled subsidiary. This tax planning strategy may be taking advantage of the:

Accepted Answer

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

Question 4

In 20Y1, Ms. Graves transferred appreciated property to KL Partnership in exchange for an ownership interest in the partnership. She deliberated waited until 20Y3 before taking cash out of the partnership. Ms. Graves may have been trying to prevent the IRS from applying the:

Accepted Answer

A)  Business purpose doctrine 
B)  Economic substance doctrine 
C)  Substance over form doctrine 
D)  Step transaction doctrine 
A)  Business purpose doctrine 
B)  Economic substance doctrine 
C)  Substance over form doctrine 
D)  Step transaction doctrine

Question 5

Deduction-shifting transactions usually occur between unrelated taxpayers.

Accepted Answer

A) True 
 B)False

Question 6

Mr. Erske 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 Mr. Erske's 30% regular tax rate, the income from investment 2 would be taxed at a 15% preferential rate, and the income from investment 3 is tax-exempt. The investments offer the following before-tax yields. Investment 1: 8.5%
Investment 2: 7.5%
Investment 3: 6.0%
Which investment should Mr. Erske select?

Accepted Answer

A)  Investment 1 
B)  Investment 2 
C)  Investment 3 
D)  Mr. Erske is neutral between investment 2 and investment 3. 
A)  Investment 1 
B)  Investment 2 
C)  Investment 3 
D)  Mr. Erske is neutral between investment 2 and investment 3.

Question 7

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?

Accepted Answer

A)  The gift consisted of a corporate bond that paid $10,000 interest to Susan this year. Even though Susan is the owner of the bond, Mrs. Reid must include the $10,000 in her taxable income. 
B)  The gift consisted of a $2,600 rent check written by tenants who lease a duplex owned by Mrs. Reid. Even though Susan cashed the check, Mrs. Reid must include the $2,600 in her taxable income. 
C)  The gift consisted of a lottery ticket. Six weeks after the gift, the ticket was drawn as a winner. Even though Susan received the $50,000 taxable prize because she was the rightful owner of the ticket, Mrs. Reid must include $50,000 in her taxable income. 
D)  None of the above is true. 
A)  The gift consisted of a corporate bond that paid $10,000 interest to Susan this year. Even though Susan is the owner of the bond, Mrs. Reid must include the $10,000 in her taxable income. 
B)  The gift consisted of a $2,600 rent check written by tenants who lease a duplex owned by Mrs. Reid. Even though Susan cashed the check, Mrs. Reid must include the $2,600 in her taxable income. 
C)  The gift consisted of a lottery ticket. Six weeks after the gift, the ticket was drawn as a winner. Even though Susan received the $50,000 taxable prize because she was the rightful owner of the ticket, Mrs. Reid must include $50,000 in her taxable income. 
D)  None of the above is true.

Question 8

Hilex Inc. liquidates its investment in General Electric corporate bonds and reinvests the proceeds in City of Miami municipal bonds. 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 9

According to the assignment of income doctrine, income must be taxed to the person receiving the cash from an income-generating transaction.

Accepted Answer

A) True 
 B)False

Question 10

NWR Inc. is structuring a transaction that will require a $200,000 deductible cash expenditure. Which of the following structures is the most effective in terms of the time period variable?

Accepted Answer

A)  NWR will pay the cash and report the deduction in 20Y1. 
B)  NWR will pay the cash and report the deduction in 20Y2. 
C)  NWR will pay the cash in 20Y2 and report the deduction in 20Y1. 
D)  NWR will pay the cash in 20Y1 and report the deduction in 20Y2. 
A)  NWR will pay the cash and report the deduction in 20Y1. 
B)  NWR will pay the cash and report the deduction in 20Y2. 
C)  NWR will pay the cash in 20Y2 and report the deduction in 20Y1. 
D)  NWR will pay the cash in 20Y1 and report the deduction in 20Y2.

Question 11

Acme Inc. is planning a transaction that requires a $100,000 deductible cash expenditure. The transaction is structured so that Acme will pay the cash and report the deduction this year (year 0). Compute the increase in the NPV of the transaction if it can be restructured so that Acme will report the deduction this year, but pay the cash three years later (year 3). Acme's marginal tax rate is 35%, and it uses a 7% discount rate to compute NPV.

Accepted Answer

A)  $15,928 
B)  $18,400 
C)  $21,516 
D)  None of the above 
A)  $15,928 
B)  $18,400 
C)  $21,516 
D)  None of the above

Question 12

The assignment of income doctrine constraints tax deferral strategies.

Accepted Answer

A) True 
 B)False

Question 13

Mrs. Stout has a $35,000 capital gain eligible for a 28% preferential tax rate. Which of the following statements is false?

Accepted Answer

A)  If Mrs. Stout's regular marginal tax rate is 15%, she can elect to recharacterize the capital gain as ordinary income. 
B)  If Mrs. Stout's regular marginal tax rate is 25%, the preferential tax rate has no value to her. 
C)  If Mrs. Stout's regular marginal tax rate is 35%, the preferential tax rate saves her $2,450 in tax. 
D)  None of the above is false. 
A)  If Mrs. Stout's regular marginal tax rate is 15%, she can elect to recharacterize the capital gain as ordinary income. 
B)  If Mrs. Stout's regular marginal tax rate is 25%, the preferential tax rate has no value to her. 
C)  If Mrs. Stout's regular marginal tax rate is 35%, the preferential tax rate saves her $2,450 in tax. 
D)  None of the above is false.

Question 14

Mrs. Day structures a transaction to shift income from her New York business to her New Hampshire business. 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 15

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?

Accepted Answer

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

Question 16

The time period variable reflects the fact that:

Accepted Answer

A)  Federal income tax rules are not stable over time. 
B)  A tax dollar paid this year cost more than a tax dollar paid in a future year. 
C)  A taxpayer's marginal rate next year may be more or less than the current marginal rate. 
D)  None of the above 
A)  Federal income tax rules are not stable over time. 
B)  A tax dollar paid this year cost more than a tax dollar paid in a future year. 
C)  A taxpayer's marginal rate next year may be more or less than the current marginal rate. 
D)  None of the above

Question 17

Which of the following statements about tax deferral is true?

Accepted Answer

A)  The value of tax deferral increases as the taxpayer's discount rate for computing NPV decreases. 
B)  Tax deferral is not an effective planning strategy if the taxpayer's marginal tax rate is stable over time. 
C)  The greater the length of time that the payment of a tax is deferred, the less the tax costs in NPV terms. 
D)  Both A. and C. are true. 
E)  are true. 
A)  The value of tax deferral increases as the taxpayer's discount rate for computing NPV decreases. 
B)  Tax deferral is not an effective planning strategy if the taxpayer's marginal tax rate is stable over time. 
C)  The greater the length of time that the payment of a tax is deferred, the less the tax costs in NPV terms. 
D)  Both A. and C. are true. 
E)  are true.

Question 18

In the United States, individuals and corporations are the two entities that pay tax on business income.

Accepted Answer

A) True 
 B)False

Question 19

Sancel Inc. is planning a transaction that will generate $70,000 taxable income and cash inflow. The transaction is structured so that Sancel 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 Sancel will receive the cash this year, but report the income two years later (year 2). Sancel's marginal tax rate is 30%, and it uses a 10% discount rate to compute NPV.

Accepted Answer

A)  $3,654 
B)  $5,318 
C)  $8,526 
D)  None of the above 
A)  $3,654 
B)  $5,318 
C)  $8,526 
D)  None of the above

Question 20

A strategy to shift income from one taxpayer to a different taxpayer reflects the entity variable, while a strategy to shift income from one year to a different year reflects the time period variable.

Accepted Answer

A) True 
 B)False

The after-tax cost of a dollar of deductible expense to a high-tax entity is less than the after-tax cost to a low-tax entity.

The time period variable is based on the time value of money.

Hilex Inc. structures a transaction to shift income from one controlled subsidiary to another controlled subsidiary. This tax planning strategy may be taking advantage of the:

In 20Y1, Ms. Graves transferred appreciated property to KL Partnership in exchange for an ownership interest in the partnership. She deliberated waited until 20Y3 before taking cash out of the partnership. Ms. Graves may have been trying to prevent the IRS from applying the:

Deduction-shifting transactions usually occur between unrelated taxpayers.

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?

Hilex Inc. liquidates its investment in General Electric corporate bonds and reinvests the proceeds in City of Miami municipal bonds. This tax planning strategy may be taking advantage of the:

According to the assignment of income doctrine, income must be taxed to the person receiving the cash from an income-generating transaction.

NWR Inc. is structuring a transaction that will require a $200,000 deductible cash expenditure. Which of the following structures is the most effective in terms of the time period variable?

The assignment of income doctrine constraints tax deferral strategies.

Mrs. Stout has a $35,000 capital gain eligible for a 28% preferential tax rate. Which of the following statements is false?

Mrs. Day structures a transaction to shift income from her New York business to her New Hampshire business. This tax planning strategy may be taking advantage of the:

The time period variable reflects the fact that:

Which of the following statements about tax deferral is true?

In the United States, individuals and corporations are the two entities that pay tax on business income.

A strategy to shift income from one taxpayer to a different taxpayer reflects the entity variable, while a strategy to shift income from one year to a different year reflects the time period variable.

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 after-tax cost of a dollar of deductible expense to a high-tax entity is less than the after-tax cost to a low-tax entity.

The time period variable is based on the time value of money.

Hilex Inc. structures a transaction to shift income from one controlled subsidiary to another controlled subsidiary. This tax planning strategy may be taking advantage of the:

In 20Y1, Ms. Graves transferred appreciated property to KL Partnership in exchange for an ownership interest in the partnership. She deliberated waited until 20Y3 before taking cash out of the partnership. Ms. Graves may have been trying to prevent the IRS from applying the:

Deduction-shifting transactions usually occur between unrelated taxpayers.

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?

Hilex Inc. liquidates its investment in General Electric corporate bonds and reinvests the proceeds in City of Miami municipal bonds. This tax planning strategy may be taking advantage of the:

According to the assignment of income doctrine, income must be taxed to the person receiving the cash from an income-generating transaction.

NWR Inc. is structuring a transaction that will require a $200,000 deductible cash expenditure. Which of the following structures is the most effective in terms of the time period variable?

The assignment of income doctrine constraints tax deferral strategies.

Mrs. Stout has a $35,000 capital gain eligible for a 28% preferential tax rate. Which of the following statements is false?

Mrs. Day structures a transaction to shift income from her New York business to her New Hampshire business. This tax planning strategy may be taking advantage of the:

The time period variable reflects the fact that:

Which of the following statements about tax deferral is true?

In the United States, individuals and corporations are the two entities that pay tax on business income.

A strategy to shift income from one taxpayer to a different taxpayer reflects the entity variable, while a strategy to shift income from one year to a different year reflects the time period variable.

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