Question 1

The entity variable is important because the amount of taxable income generated by a business depends on the type of entity conducting the business.

Accepted Answer

A) True 
 B)False

Question 2

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 3

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 4

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 5

Tax avoidance is the reduction of a person's tax liability through illegal means.

Accepted Answer

A) True 
 B)False

Question 6

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 7

Which of the following statements about tax legal doctrines is false?

Accepted Answer

A) The scope of the economic substance, business purpose, substance over form, and step transaction doctrines often overlap. 
B) Taxpayers can invoke the substance over form doctrine to undo the tax consequences of a failed planning strategy. 
C) The IRS's application of the doctrines is subjective. 
D) The economic substance, business purpose, substance over form, and step transaction doctrines increase the uncertainty of the tax law. 
A) The scope of the economic substance, business purpose, substance over form, and step transaction doctrines often overlap. 
B) Taxpayers can invoke the substance over form doctrine to undo the tax consequences of a failed planning strategy. 
C) The IRS's application of the doctrines is subjective. 
D) The economic substance, business purpose, substance over form, and step transaction doctrines increase the uncertainty of the tax law.

Question 8

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 9

Which of the following statements about tax avoidance and tax evasion is false?

Accepted Answer

A) Tax avoidance is legal, while tax evasion is illegal. 
B) The difference between avoidance and evasion is clearly defined in the tax law. 
C) Tax evasion is a federal felony offence. 
D) Taxpayers should not regard tax avoidance as unethical. 
A) Tax avoidance is legal, while tax evasion is illegal. 
B) The difference between avoidance and evasion is clearly defined in the tax law. 
C) Tax evasion is a federal felony offence. 
D) Taxpayers should not regard tax avoidance as unethical.

Question 10

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 11

Mrs. Day structures a transaction to shift income from her sole proprietorship to her grandson's 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 12

A taxpayer who invests in a growth stock rather than a stock that pays an annual dividend is engaging in tax planning based on 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 13

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 14

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

Accepted Answer

A) True 
 B)False

Question 15

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 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

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

Accepted Answer

A) True 
 B)False

Question 18

Tax evasion is a federal crime punishable by imprisonment.

Accepted Answer

A) True 
 B)False

Question 19

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 20

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. 
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.

The entity variable is important because the amount of taxable income generated by a business depends on the type of entity conducting the business.

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:

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.

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

Tax avoidance is the reduction of a person's tax liability through illegal means.

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

Which of the following statements about tax legal doctrines is false?

Which of the following statements about tax avoidance and tax evasion is false?

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:

Mrs. Day structures a transaction to shift income from her sole proprietorship to her grandson's business. This tax planning strategy may be taking advantage of the:

A taxpayer who invests in a growth stock rather than a stock that pays an annual dividend is engaging in tax planning based on the:

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

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

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

Tax evasion is a federal crime punishable by imprisonment.

Which of the following statements is true?

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

The entity variable is important because the amount of taxable income generated by a business depends on the type of entity conducting the business.

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:

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.

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

Tax avoidance is the reduction of a person's tax liability through illegal means.

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

Which of the following statements about tax legal doctrines is false?

Which of the following statements about tax avoidance and tax evasion is false?

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:

Mrs. Day structures a transaction to shift income from her sole proprietorship to her grandson's business. This tax planning strategy may be taking advantage of the:

A taxpayer who invests in a growth stock rather than a stock that pays an annual dividend is engaging in tax planning based on the:

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

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

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

Tax evasion is a federal crime punishable by imprisonment.

Which of the following statements is true?

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