Question 1

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  True

Question 2

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 B

Question 3

Tax planning strategies to enhance NPV must reflect all four tax planning maxims.

Accepted Answer

A) True 
 B)False  False

Question 4

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 5

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. 
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.

Question 6

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 7

Which of the following statements about implicit and explicit taxes is false?

Accepted Answer

A) The taxpayer pays an explicit tax to the taxing jurisdiction. 
B) An investment yielding ordinary income taxed at the regular tax rates should not have an implicit tax. 
C) Any implicit tax on investment income is always more than the explicit tax on the income. 
D) An implicit tax reduces the before-tax yield on an investment. 
A) The taxpayer pays an explicit tax to the taxing jurisdiction. 
B) An investment yielding ordinary income taxed at the regular tax rates should not have an implicit tax. 
C) Any implicit tax on investment income is always more than the explicit tax on the income. 
D) An implicit tax reduces the before-tax yield on an investment.

Question 8

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 9

The assignment of income doctrine holds that:

Accepted Answer

A) Income from a transaction must be taxed to the person who receives the cash from the transaction. 
B) Income from a transaction must be taxed to the person who reports the transaction on his or her tax return. 
C) Income from a transaction must be taxed to the person that earns the income. 
D) None of the above 
A) Income from a transaction must be taxed to the person who receives the cash from the transaction. 
B) Income from a transaction must be taxed to the person who reports the transaction on his or her tax return. 
C) Income from a transaction must be taxed to the person that earns the income. 
D) None of the above

Question 10

Corporations, LLCs, and partnerships are all taxable entities.

Accepted Answer

A) True 
 B)False

Question 11

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 12

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 13

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 14

Mr. Dole needed to sell appreciated stock out of his investment portfolio to generate cash to pay for his Christmas spending. He decided to postpone the sale from December 20Y1 until January 20Y2. Mr. Dole is 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

Assume that Congress recently amended the tax law to provide for a maximum 12% rate on interest income from U.S. savings bonds. Compute the tax savings from this preferential rate for:
A.Mrs.Edwin saved $8.70 ($290 * [15% ordinary rate - 12% preferential rate]).
A.Mrs.Edwin, who has a 15% marginal rate on ordinary income and earned $290 interest on her investment in U.S.savings bonds.
B.Mr.Kalter saved $66.70 ($290 * [35% ordinary rate - 12% preferential rate]).
B.Mr.Kalter, who has a 35% marginal rate on ordinary income and earned $290 interest on his investment in U.S.savings bonds.

Accepted Answer

A. Mrs. Edwin saved $8.70 ($29

Question 16

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 17

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

Accepted Answer

A) True 
 B)False

Question 18

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 19

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 20

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

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

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:

Tax planning strategies to enhance NPV must reflect all four tax planning maxims.

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

Which of the following statements about tax deferral is true?

Mrs. Day structures a transaction to convert income from ordinary income to capital gain. This tax planning strategy may be taking advantage of the:

Which of the following statements about implicit and explicit taxes is false?

The assignment of income doctrine holds that:

Corporations, LLCs, and partnerships are all taxable entities.

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?

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

Mr. Dole needed to sell appreciated stock out of his investment portfolio to generate cash to pay for his Christmas spending. He decided to postpone the sale from December 20Y1 until January 20Y2. Mr. Dole is taking advantage of the:

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

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:

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.

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:

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 a Present Value of $1 B Present Value of Annuity of $1 C 2013 Income Tax Rates

Filters

Exam 4: Maxims of Income Tax Planning

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

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:

Tax planning strategies to enhance NPV must reflect all four tax planning maxims.

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

Which of the following statements about tax deferral is true?

Mrs. Day structures a transaction to convert income from ordinary income to capital gain. This tax planning strategy may be taking advantage of the:

Which of the following statements about implicit and explicit taxes is false?

The assignment of income doctrine holds that:

Corporations, LLCs, and partnerships are all taxable entities.

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?

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

Mr. Dole needed to sell appreciated stock out of his investment portfolio to generate cash to pay for his Christmas spending. He decided to postpone the sale from December 20Y1 until January 20Y2. Mr. Dole is taking advantage of the:

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

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:

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.

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:

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 a Present Value of $1 B Present Value of Annuity of $1 C 2013 Income Tax Rates

Filters