Question 1

The time period variable reflects the fact that:

Accepted Answer

A)  Federal income tax rules are not stable over time. 
B)  A tax dollar paid this year cost more than a tax dollar paid in a future year. 
C)  A taxpayer's marginal rate next year may be more or less than the current marginal rate. 
D)  None of the above 
A)  Federal income tax rules are not stable over time. 
B)  A tax dollar paid this year cost more than a tax dollar paid in a future year. 
C)  A taxpayer's marginal rate next year may be more or less than the current marginal rate. 
D)  None of the above

Question 2

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 3

The assignment of income doctrine constraints tax deferral strategies.

Accepted Answer

A) True 
 B)False

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 ordinary income and capital gain is true?

Accepted Answer

A)  Income characterized as capital gain can have no additional tax characteristics. 
B)  Individuals pay tax on their capital gains at a preferential rate. 
C)  Corporations pay tax on both ordinary income and capital gain at their regular rate. 
D)  Individuals pay tax on their capital gains at a preferential rate and corporations pay tax on both ordinary income and capital gain at their regular rate. 
A)  Income characterized as capital gain can have no additional tax characteristics. 
B)  Individuals pay tax on their capital gains at a preferential rate. 
C)  Corporations pay tax on both ordinary income and capital gain at their regular rate. 
D)  Individuals pay tax on their capital gains at a preferential rate and corporations pay tax on both ordinary income and capital gain at their regular rate.

Question 6

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 7

Hilex Inc. structures a transaction to shift income from its 20Y0 tax year to its 20Y2 tax year. 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 8

Mrs. Lester has the choice between two transactions. Transaction A will generate $175,000 taxable cash flow in the current year (year 0). Transaction B will generate $160,000 cash flow in the current year, but Mrs. Lester will not be required to report $160,000 income for two years (year 2). Mrs. Lester has a 40% marginal tax rate and uses a 9% discount rate to compute NPV. Which of the following statements is true?

Accepted Answer

A)  Mrs. Lester should choose transaction A because it generates more before-tax cash flow than transaction B 
B)  Mrs. Lester should choose transaction A because its NPV exceeds transaction B's NPV. 
C)  Mrs. Lester should choose transaction B because the tax cost is deferred one year. 
D)  Mrs. Lester should choose transaction B because its NPV exceeds transaction A's NPV. 
A)  Mrs. Lester should choose transaction A because it generates more before-tax cash flow than transaction B 
B)  Mrs. Lester should choose transaction A because its NPV exceeds transaction B's NPV. 
C)  Mrs. Lester should choose transaction B because the tax cost is deferred one year. 
D)  Mrs. Lester should choose transaction B because its NPV exceeds transaction A's NPV.

Question 9

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 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

Mr. Fox has $200,000 to invest. He could buy corporate bonds with a 10% before-tax yield or tax-exempt bonds with an 8% before-tax yield. Which of the following statements is false?

Accepted Answer

A)  If Mr. Fox invests in the tax-exempt bonds, he will pay $4,000 implicit tax every year. 
B)  If Mr. Fox's marginal tax rate is 15%, he should invest in the corporate bonds. 
C)  If Mr. Fox's marginal tax rate is 40%, he should invest in the tax-exempt bonds. 
D)  None of the above is false. 
A)  If Mr. Fox invests in the tax-exempt bonds, he will pay $4,000 implicit tax every year. 
B)  If Mr. Fox's marginal tax rate is 15%, he should invest in the corporate bonds. 
C)  If Mr. Fox's marginal tax rate is 40%, he should invest in the tax-exempt bonds. 
D)  None of the above is false.

Question 12

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 13

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 14

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 15

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 16

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 17

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 18

Carter Inc. and CCC Inc. are owned by the same family. Carter's marginal tax rate is 30%, and CCC's marginal tax rate is 20%. Carter has the opportunity to engage in a transaction that will generate $500,000 taxable cash flow. Alternatively, CCC could engage in the transaction. However, CCC would incur an extra $42,500 deductible cash expense with respect to the transaction. Which of the following statements is true?

Accepted Answer

A)  CCC should engage in the transaction to generate $16,000 more after-tax cash flow. 
B)  Carter should engage in the transaction to avoid the extra expense. 
C)  CCC should engage in the transaction because it has the lower marginal tax rate. 
D)  Because Carter and CCC are owned by the same family, the family is indifferent as to which corporation engages in the transaction. 
A)  CCC should engage in the transaction to generate $16,000 more after-tax cash flow. 
B)  Carter should engage in the transaction to avoid the extra expense. 
C)  CCC should engage in the transaction because it has the lower marginal tax rate. 
D)  Because Carter and CCC are owned by the same family, the family is indifferent as to which corporation engages in the transaction.

Question 19

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

Question 20

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/an:

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

The time period variable reflects the fact that:

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

The assignment of income doctrine constraints tax deferral strategies.

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

Hilex Inc. structures a transaction to shift income from its 20Y0 tax year to its 20Y2 tax year. This tax planning strategy may be taking advantage of the:

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:

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:

Mr. Fox has $200,000 to invest. He could buy corporate bonds with a 10% before-tax yield or tax-exempt bonds with an 8% before-tax yield. Which of the following statements is false?

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

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:

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.

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

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/an:

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

The time period variable reflects the fact that:

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

The assignment of income doctrine constraints tax deferral strategies.

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

Hilex Inc. structures a transaction to shift income from its 20Y0 tax year to its 20Y2 tax year. This tax planning strategy may be taking advantage of the:

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:

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:

Mr. Fox has $200,000 to invest. He could buy corporate bonds with a 10% before-tax yield or tax-exempt bonds with an 8% before-tax yield. Which of the following statements is false?

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

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:

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.

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

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/an:

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