Question 1

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

Accepted Answer

A) True 
 B)False  False

Question 2

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. D

Question 3

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. D

Question 4

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 5

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 6

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 7

A planning strategy that defers a tax cost without deferring the receipt of before-tax cash flows decreases the NPV of the transaction.

Accepted Answer

A) True 
 B)False

Question 8

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 9

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 10

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 11

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 12

Mrs. James plans to invest in one of two investment alternatives having the same risk. Investment 1 has a before-tax return of 10% and the income from investment 1 would be taxed at Mrs. James' 35% regular tax rate. Investment 2 has a before-tax return of 8% and the income from investment 2 would be taxed at a 15% preferential rate. Which of the following statements regarding these investment choices is false?

Accepted Answer

A)  The after-tax rate of return on investment 1 is 6.5%. 
B)  The after-tax rate of return on investment 2 is 6.8%. 
C)  Investment 2 bears implicit tax relative to investment 1. 
D)  Mrs. James should choose investment 1. 
A)  The after-tax rate of return on investment 1 is 6.5%. 
B)  The after-tax rate of return on investment 2 is 6.8%. 
C)  Investment 2 bears implicit tax relative to investment 1. 
D)  Mrs. James should choose investment 1.

Question 13

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 14

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 15

A reduced market rate of return on a tax-favored investment is called an implicit tax.

Accepted Answer

A) True 
 B)False

Question 16

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 17

Which of the following statements about tax planning is false?

Accepted Answer

A)  The goal of tax planning is tax minimization. 
B)  Tax planning involves structuring transactions to reduce tax costs or increase tax savings. 
C)  Sound tax planning ideas should be entirely legal. 
D)  None of the above is false. 
A)  The goal of tax planning is tax minimization. 
B)  Tax planning involves structuring transactions to reduce tax costs or increase tax savings. 
C)  Sound tax planning ideas should be entirely legal. 
D)  None of the above is false.

Question 18

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 19

Corporations, LLCs, and partnerships are all taxable entities.

Accepted Answer

A) True 
 B)False

Question 20

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.

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

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?

Which of the following statements about tax strategies is false?

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 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.

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

A planning strategy that defers a tax cost without deferring the receipt of before-tax cash flows decreases the NPV of the transaction.

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

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:

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 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:

A reduced market rate of return on a tax-favored investment is called an implicit tax.

Which of the following statements about tax planning is false?

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

Corporations, LLCs, and partnerships are all taxable entities.

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?

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

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

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?

Which of the following statements about tax strategies is false?

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 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.

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

A planning strategy that defers a tax cost without deferring the receipt of before-tax cash flows decreases the NPV of the transaction.

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

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:

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 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:

A reduced market rate of return on a tax-favored investment is called an implicit tax.

Which of the following statements about tax planning is false?

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

Corporations, LLCs, and partnerships are all taxable entities.

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?

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