Question 1

Which of the following statements about public market transactions is true?

Accepted Answer

A)  The parties negotiate directly with each other. 
B)  The parties must engage in unilateral instead of bilateral tax planning. 
C)  The parties are not transacting at arm's length. 
D)  Both parties have flexibility in determining the legal and financial characteristics of the transaction. 
A)  The parties negotiate directly with each other. 
B)  The parties must engage in unilateral instead of bilateral tax planning. 
C)  The parties are not transacting at arm's length. 
D)  Both parties have flexibility in determining the legal and financial characteristics of the transaction.

Question 2

Ms. Leik has $50,000 in an investment paying 10% annual interest. Each year, she incurs a $600 cash expense relating to the investment. If Ms. Leik's marginal tax rate is 20%, which of the following statements is true?

Accepted Answer

A)  Ms. Leik's annual after-tax cash flow from this investment is $3,520. 
B)  If the interest is taxable but the expense is not deductible, Ms. Leik's annual after-tax cash flow from the investment is $3,400. 
C)  If the interest is tax-exempt and the expense is not deductible, Ms. Leik's annual after-tax cash flow is $5,000. 
D)  None of the above is true. 
A)  Ms. Leik's annual after-tax cash flow from this investment is $3,520. 
B)  If the interest is taxable but the expense is not deductible, Ms. Leik's annual after-tax cash flow from the investment is $3,400. 
C)  If the interest is tax-exempt and the expense is not deductible, Ms. Leik's annual after-tax cash flow is $5,000. 
D)  None of the above is true.

Question 3

Omar Inc. paid a $24,000 expense, only $18,000 of which was deductible. If Omar's marginal tax rate is 40%, compute the after-tax cost of the expense.

Accepted Answer

A)  $24,000 
B)  $18,000 
C)  $16,800 
D)  $10,800 
A)  $24,000 
B)  $18,000 
C)  $16,800 
D)  $10,800

Question 4

Ms. Teague incurred a $35,000 expense. If her marginal tax rate is 20%, which of the following statements is true?

Accepted Answer

A)  If the expense is nondeductible, Ms. Teague's after-tax cost is zero. 
B)  If the expense is deductible, Ms. Teague's after-tax cost is $28,000. 
C)  If only $17,500 of the expense is deductible, Ms. Teague's after-tax cost is $14,000. 
D)  Statements A. and B. are true. 
A)  If the expense is nondeductible, Ms. Teague's after-tax cost is zero. 
B)  If the expense is deductible, Ms. Teague's after-tax cost is $28,000. 
C)  If only $17,500 of the expense is deductible, Ms. Teague's after-tax cost is $14,000. 
D)  Statements A. and B. are true.

Question 5

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 6

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 7

Mr. Vail made an offer to purchase a business for sale by Mr. Craig. Mr. Vail and Mr. Craig had never met prior to their negotiation of the terms of the sale. The sale is an example of a/an:

Accepted Answer

A)  Arm's length transaction 
B)  Private market transaction 
C)  Public market transaction 
D)  Both A. and B. 
A)  Arm's length transaction 
B)  Private market transaction 
C)  Public market transaction 
D)  Both A. and B.

Question 8

Ms. Lenz has $100,000 in an investment paying 9% annual interest. Her marginal tax rate is 25%. Which of the following statements is false?

Accepted Answer

A)  Ms. Lenz's annual before-tax cash flow from this investment is $9,000. 
B)  If the interest is tax-exempt, Ms. Lenz's annual after-tax cash flow is $9,000. 
C)  If the interest is taxable, Ms. Lenz's annual after-tax cash flow is $6,750. 
D)  None of the above is false. 
A)  Ms. Lenz's annual before-tax cash flow from this investment is $9,000. 
B)  If the interest is tax-exempt, Ms. Lenz's annual after-tax cash flow is $9,000. 
C)  If the interest is taxable, Ms. Lenz's annual after-tax cash flow is $6,750. 
D)  None of the above is false.

Question 9

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

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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 12

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 13

The before-tax cash flow and after-tax cash flow from a nontaxable transaction are equal.

Accepted Answer

A) True 
 B)False

Question 14

The tax savings from a deduction decreases as the taxpayer's marginal tax rate increases.

Accepted Answer

A) True 
 B)False

Question 15

Ms. Kent has $200,000 in an investment paying 8% annual interest. Her marginal tax rate is 40%. Which of the following statements is false?

Accepted Answer

A)  Ms. Kent's annual before-tax cash flow from this investment is $16,000. 
B)  If the interest is tax-exempt, Ms. Kent's annual after-tax cash flow is $16,000. 
C)  If the interest is taxable, Ms. Kent's annual after-tax cash flow is $6,400. 
D)  None of the above is false. 
A)  Ms. Kent's annual before-tax cash flow from this investment is $16,000. 
B)  If the interest is tax-exempt, Ms. Kent's annual after-tax cash flow is $16,000. 
C)  If the interest is taxable, Ms. Kent's annual after-tax cash flow is $6,400. 
D)  None of the above is false.

Question 16

Mrs. Biggs invested in a business that will generate the following cash flows over a three-year period.   If Mrs. Biggs' marginal tax rate over the three year period is 30% and she uses a 6% discount rate, compute the NPV of the transaction.

Accepted Answer

A)  $61,453 
B)  $52,771 
C)  $47,781 
D)  None of the above 
A)  $61,453 
B)  $52,771 
C)  $47,781 
D)  None of the above

Question 17

The arm's length transaction presumption

Accepted Answer

A)  Assumes that each party is dealing in its own economic self-interest. 
B)  Cannot be satisfied in a private market transaction. 
C)  Requires direct negotiation between parties to ensure an arm's length price. 
D)  Applies to both related party and unrelated party transactions. 
A)  Assumes that each party is dealing in its own economic self-interest. 
B)  Cannot be satisfied in a private market transaction. 
C)  Requires direct negotiation between parties to ensure an arm's length price. 
D)  Applies to both related party and unrelated party transactions.

Question 18

Related party transactions occur in a public market.

Accepted Answer

A) True 
 B)False

Question 19

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 20

KRU Company engaged in a current-year transaction that required a $20,000 cash outflow. Which of the following statements is true?

Accepted Answer

A)  If the cash outflow is deductible and BMX's marginal tax rate is 20%, the tax savings from the transaction is $4,000. 
B)  If the cash outflow is deductible and BMX's marginal tax rate is 30%, the tax cost of the transaction is $6,000. 
C)  If the cash outflow is not deductible, the current-year tax savings of the transaction is zero. 
D)  All of the above are true. 
A)  If the cash outflow is deductible and BMX's marginal tax rate is 20%, the tax savings from the transaction is $4,000. 
B)  If the cash outflow is deductible and BMX's marginal tax rate is 30%, the tax cost of the transaction is $6,000. 
C)  If the cash outflow is not deductible, the current-year tax savings of the transaction is zero. 
D)  All of the above are true.

Which of the following statements about public market transactions is true?

Ms. Leik has $50,000 in an investment paying 10% annual interest. Each year, she incurs a $600 cash expense relating to the investment. If Ms. Leik's marginal tax rate is 20%, which of the following statements is true?

Omar Inc. paid a $24,000 expense, only $18,000 of which was deductible. If Omar's marginal tax rate is 40%, compute the after-tax cost of the expense.

Ms. Teague incurred a $35,000 expense. If her marginal tax rate is 20%, which of the following statements is true?

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

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?

Mr. Vail made an offer to purchase a business for sale by Mr. Craig. Mr. Vail and Mr. Craig had never met prior to their negotiation of the terms of the sale. The sale is an example of a/an:

Ms. Lenz has $100,000 in an investment paying 9% annual interest. Her marginal tax rate is 25%. Which of the following statements is false?

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

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

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

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

The before-tax cash flow and after-tax cash flow from a nontaxable transaction are equal.

The tax savings from a deduction decreases as the taxpayer's marginal tax rate increases.

Ms. Kent has $200,000 in an investment paying 8% annual interest. Her marginal tax rate is 40%. Which of the following statements is false?

Mrs. Biggs invested in a business that will generate the following cash flows over a three-year period. If Mrs. Biggs' marginal tax rate over the three year period is 30% and she uses a 6% discount rate, compute the NPV of the transaction.

The arm's length transaction presumption

Related party transactions occur in a public market.

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

KRU Company engaged in a current-year transaction that required a $20,000 cash outflow. Which of the following statements is true?

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

Which of the following statements about public market transactions is true?

Ms. Leik has $50,000 in an investment paying 10% annual interest. Each year, she incurs a $600 cash expense relating to the investment. If Ms. Leik's marginal tax rate is 20%, which of the following statements is true?

Omar Inc. paid a $24,000 expense, only $18,000 of which was deductible. If Omar's marginal tax rate is 40%, compute the after-tax cost of the expense.

Ms. Teague incurred a $35,000 expense. If her marginal tax rate is 20%, which of the following statements is true?

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

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?

Mr. Vail made an offer to purchase a business for sale by Mr. Craig. Mr. Vail and Mr. Craig had never met prior to their negotiation of the terms of the sale. The sale is an example of a/an:

Ms. Lenz has $100,000 in an investment paying 9% annual interest. Her marginal tax rate is 25%. Which of the following statements is false?

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

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

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

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

The before-tax cash flow and after-tax cash flow from a nontaxable transaction are equal.

The tax savings from a deduction decreases as the taxpayer's marginal tax rate increases.

Ms. Kent has $200,000 in an investment paying 8% annual interest. Her marginal tax rate is 40%. Which of the following statements is false?

Mrs. Biggs invested in a business that will generate the following cash flows over a three-year period. If Mrs. Biggs' marginal tax rate over the three year period is 30% and she uses a 6% discount rate, compute the NPV of the transaction.

The arm's length transaction presumption

Related party transactions occur in a public market.

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

KRU Company engaged in a current-year transaction that required a $20,000 cash outflow. Which of the following statements is true?

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