Question 1

Income-shifting transactions occur more frequently between related parties than between unrelated parties.

Accepted Answer

A) True 
 B)False

Question 2

Bailey Inc. is planning a transaction that requires a $60,000 deductible cash expenditure. The transaction is structured so that Bailey 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 Bailey will report the deduction this year, but pay the cash two years later (year 2). Bailey's marginal tax rate is 25%, and it uses a 9% discount rate to compute NPV.

Accepted Answer

A) $8,677 
B) $9,014 
C) $9,480 
D) None of the above 
A) $8,677 
B) $9,014 
C) $9,480 
D) None of the above

Question 3

The tax law provides that individuals do not pay tax on the first $250,000 of gain realized on the sale of a principal residence. This rule is an example 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 4

Mr. Crum, an architect, billed a client $12,500 for professional services rendered. When Mr. Crum received a check in full payment from the client, he endorsed the check and mailed it to his college-age son, Paul, who cashed it and deposited the $12,500 in his own bank account. Which of the following statements is a correct application of the assignment of income doctrine?

Accepted Answer

A) Mr.Crum must report $12,500 income on his tax return because he earned it. 
B) Paul must report $12,500 income on his tax return because he received the cash. 
C) It is illegal for Mr.Crum to transfer the check to Paul. 
D) Mr.Crum and Paul may decide which one of them reports $12,500 income on his tax return. 
A) Mr.Crum must report $12,500 income on his tax return because he earned it. 
B) Paul must report $12,500 income on his tax return because he received the cash. 
C) It is illegal for Mr.Crum to transfer the check to Paul. 
D) Mr.Crum and Paul may decide which one of them reports $12,500 income on his tax return.

Question 5

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

Accepted Answer

A) The amount of implicit tax on an investment depends on the owner's marginal tax rate. 
B) The taxpayer pays an explicit tax to the taxing jurisdiction. 
C) An investment yielding ordinary income taxed at the regular tax rates should not have an implicit tax. 
D) None of the above is false. 
A) The amount of implicit tax on an investment depends on the owner's marginal tax rate. 
B) The taxpayer pays an explicit tax to the taxing jurisdiction. 
C) An investment yielding ordinary income taxed at the regular tax rates should not have an implicit tax. 
D) None of the above is false.

Question 6

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 7

A taxpayer should prefer to pay a $100 implicit tax rather than a $100 explicit tax.

Accepted Answer

A) True 
 B)False

Question 8

Mr. Hayes 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. Hayes' 25% 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 9.0%
Investment 2: 7.5%
Investment 3: 6.0%
Which investment should Mr. Hayes select?

Accepted Answer

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

Question 9

Which of the following statements about tax strategies is false?

Accepted Answer

A) Tax planners should prefer a simple strategy over a complex strategy. 
B) Tax planners should prefer a flexible strategy over an inflexible strategy. 
C) Tax planners should consider the tax consequences of a strategy to all parties. 
D) None of the above is false. 
A) Tax planners should prefer a simple strategy over a complex strategy. 
B) Tax planners should prefer a flexible strategy over an inflexible strategy. 
C) Tax planners should consider the tax consequences of a strategy to all parties. 
D) None of the above is false.

Question 10

The rate at which an item of income is taxed depends on the tax character of the income.

Accepted Answer

A) True 
 B)False

Question 11

Jelk Company is structuring a transaction that will generate $140,000 taxable revenue and cash inflow. Which of the following structures is the most effective in terms of the time period variable?

Accepted Answer

A) Jelk will receive the cash and report the income in 20Y1. 
B) Jelk will receive the cash in 20Y2 and report the income in 20Y1. 
C) Jelk will receive the cash and report the income in 20Y2. 
D) Jelk will receive the cash in 20Y1 and report the income in 20Y2. 
A) Jelk will receive the cash and report the income in 20Y1. 
B) Jelk will receive the cash in 20Y2 and report the income in 20Y1. 
C) Jelk will receive the cash and report the income in 20Y2. 
D) Jelk will receive the cash in 20Y1 and report the income in 20Y2.

Question 12

A taxpayer may choose to accept a reduced market rate of return on an investment to take advantage of a tax preference associated with the investment. In such case, the taxpayer will pay a(n):

Accepted Answer

A) Excise tax 
B) Explicit tax 
C) Implicit tax 
D) Transaction tax 
A) Excise tax 
B) Explicit tax 
C) Implicit tax 
D) Transaction tax

Question 13

Deduction-shifting transactions usually occur between unrelated taxpayers.

Accepted Answer

A) True 
 B)False

Question 14

The goal of tax planning is to reduce tax costs or increase tax savings as much as possible.

Accepted Answer

A) True 
 B)False

Question 15

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 16

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 17

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 18

Which of the following statements about ordinary income and capital gain is false?

Accepted Answer

A) Every item of income is ultimately characterized as either ordinary income or capital gain for federal tax purposes. 
B) Most ordinary income items are taxed at the regular individual or corporate tax rates. 
C) Individuals and corporations pay tax on their capital gains at a preferential rate. 
D) None of the above is false. 
A) Every item of income is ultimately characterized as either ordinary income or capital gain for federal tax purposes. 
B) Most ordinary income items are taxed at the regular individual or corporate tax rates. 
C) Individuals and corporations pay tax on their capital gains at a preferential rate. 
D) None of the above is false.

Question 19

Gregly Company, which has a 33% marginal tax rate, plans to make an investment that should generate $300,000 annual cash flow/ordinary income. Instead of making the investment directly, Gregly could form a new taxable entity (L'il Greg) to make the investment. L'il Greg's marginal tax rate on the investment income would be only 25%. However, L'il Greg would have to incur a $26,500 annual nondeductible expense associated with the investment that Gregly would not incur.
A.Gregly's annual after-tax cash flow if it made the investment directly would be $201,000 ($300,000 taxable income - $99,000 tax cost).L'il Greg's annual after-tax cash flow would be $198,500 ($300,000 taxable income - $75,000 tax cost - $26,500 nondeductible expense.) Therefore, Gregly should make the investment directly.
A.Should Gregly make the investment directly or make it through L'il Greg to maximize after-tax cash flow?
B.L'il Greg's annual after-tax cash flow would be $205,125 ($300,000 - $26,500 deductible expense - $68,375 tax cost [$273,500 taxable income * 25%]).Therefore, Gregly should make the investment through L'il Greg.
B.Would your answer change if L'il Greg could deduct its $26,500 additional expense?

Accepted Answer

A. Gregly's annual after-tax cash flow i

Question 20

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.

Income-shifting transactions occur more frequently between related parties than between unrelated parties.

The tax law provides that individuals do not pay tax on the first $250,000 of gain realized on the sale of a principal residence. This rule is an example of the:

Which of the following statements about implicit and explicit taxes is 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.

A taxpayer should prefer to pay a $100 implicit tax rather than a $100 explicit tax.

Which of the following statements about tax strategies is false?

The rate at which an item of income is taxed depends on the tax character of the income.

Jelk Company is structuring a transaction that will generate $140,000 taxable revenue and cash inflow. Which of the following structures is the most effective in terms of the time period variable?

A taxpayer may choose to accept a reduced market rate of return on an investment to take advantage of a tax preference associated with the investment. In such case, the taxpayer will pay a(n):

Deduction-shifting transactions usually occur between unrelated taxpayers.

The goal of tax planning is to reduce tax costs or increase tax savings as much as possible.

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 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.

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 about ordinary income and capital gain is false?

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?

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

Income-shifting transactions occur more frequently between related parties than between unrelated parties.

The tax law provides that individuals do not pay tax on the first $250,000 of gain realized on the sale of a principal residence. This rule is an example of the:

Which of the following statements about implicit and explicit taxes is 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.

A taxpayer should prefer to pay a $100 implicit tax rather than a $100 explicit tax.

Which of the following statements about tax strategies is false?

The rate at which an item of income is taxed depends on the tax character of the income.

Jelk Company is structuring a transaction that will generate $140,000 taxable revenue and cash inflow. Which of the following structures is the most effective in terms of the time period variable?

A taxpayer may choose to accept a reduced market rate of return on an investment to take advantage of a tax preference associated with the investment. In such case, the taxpayer will pay a(n):

Deduction-shifting transactions usually occur between unrelated taxpayers.

The goal of tax planning is to reduce tax costs or increase tax savings as much as possible.

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 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.

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 about ordinary income and capital gain is false?

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?

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