Question 1

When considering cash outflows, higher present values are preferred.

Accepted Answer

A) True 
 B)False

Question 2

Explain why $1 today is not equal to $1 in the future. Why is understanding this concept particularly important for tax planning? What tax strategy exploits this concept?

Accepted Answer

Assuming an investor can earn a positive

Question 3

Virtually every transaction involves the taxpayer and two other parties that have an interest in the tax ramifications of the transaction.

Accepted Answer

A) True 
 B)False

Question 4

Danny argues that tax accountants suffer from one-mindedness in their attempts at tax planning (i.e., reducing taxes at all costs). Is Danny's view of tax planning correct - i.e., does he understand what the goal of tax planning is? Please elaborate.

Accepted Answer

Danny has an incomplete view of the goal

Question 5

If Joel earns a 10% after-tax rate of return, $10,000 received in two years is worth how much today? (round present and future value amounts to 3 places)

Accepted Answer

A) $10,000. 
B) $9,090. 
C) $8,260. 
D) $11,000. 
E) None of these. 
A) $10,000. 
B) $9,090. 
C) $8,260. 
D) $11,000. 
E) None of these.

Question 6

Assume that Larry's marginal tax rate is 25%. If corporate bonds pay 10% interest, what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

Accepted Answer

A) 25%. 
B) 12.5%. 
C) 10%. 
D) 7.5%. 
E) None of these. 
A) 25%. 
B) 12.5%. 
C) 10%. 
D) 7.5%. 
E) None of these.

Question 7

Assume that Lucas' marginal tax rate is 30% and his tax rate on dividends is 15%. If a dividend-paying stock (with no growth potential) pays an 8% dividend yield, what interest rate would a municipal bond have to offer for Lucas to be indifferent between the two investments from a cash-flow perspective?

Accepted Answer

A) 30%. 
B) 15%. 
C) 8%. 
D) 6.8%. 
E) None of these. 
A) 30%. 
B) 15%. 
C) 8%. 
D) 6.8%. 
E) None of these.

Question 8

Assume that Jose is indifferent between investing in a corporate bond that pays 10% interest and a stock with no growth potential that pays an 8% dividend yield. Assume that the tax rate on dividends is 15%. What is Jose's marginal tax rate?

Accepted Answer

A) 47%. 
B) 37%. 
C) 32%. 
D) 15%. 
E) None of these. 
A) 47%. 
B) 37%. 
C) 32%. 
D) 15%. 
E) None of these.

Question 9

The constructive receipt doctrine:

Accepted Answer

A) is particularly restrictive for accrual basis taxpayers. 
B) causes income to be recognized before it is actually received. 
C) causes income to be recognized after it is actually received. 
D) applies equally to income and expenses. 
E) None of these. 
A) is particularly restrictive for accrual basis taxpayers. 
B) causes income to be recognized before it is actually received. 
C) causes income to be recognized after it is actually received. 
D) applies equally to income and expenses. 
E) None of these.

Question 10

Assume that Keisha's marginal tax rate is 40% and her tax rate on dividends is 15%. If a city of Atlanta bond pays 7.65% interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Keisha to be indifferent between the two investments from a cash-flow perspective?

Accepted Answer

A) 15%. 
B) 10%. 
C) 9%. 
D) 7.65%. 
E) None of these. 
A) 15%. 
B) 10%. 
C) 9%. 
D) 7.65%. 
E) None of these.

Question 11

If tax rates are decreasing:

Accepted Answer

A) taxpayers should accelerate income. 
B) taxpayers should defer deductions. 
C) taxpayers should accelerate deductions. 
D) taxpayers should defer deductions and accelerate income. 
E) None of these. 
A) taxpayers should accelerate income. 
B) taxpayers should defer deductions. 
C) taxpayers should accelerate deductions. 
D) taxpayers should defer deductions and accelerate income. 
E) None of these.

Question 12

Assume that Lavonia's marginal tax rate is 20%. If a city of Tampa bond pays 5% interest, what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

Accepted Answer

A) 20%. 
B) 8%. 
C) 7%. 
D) 4%. 
E) None of these. 
A) 20%. 
B) 8%. 
C) 7%. 
D) 4%. 
E) None of these.

Question 13

If Julius has a 30% tax rate and a 10% after-tax rate of return, a $40,000 tax deduction in two years will save how much tax in today's dollars? (round present and future value amounts to 3 places)

Accepted Answer

A) $40,000. 
B) $9,912. 
C) $33,040. 
D) $12,000. 
E) None of these. 
A) $40,000. 
B) $9,912. 
C) $33,040. 
D) $12,000. 
E) None of these.

Question 14

David, an attorney and cash basis taxpayer, is new to the concept of tax planning and recently learned of the timing strategy. To implement the timing strategy, David plans to establish a new policy that allows his clients to wait up to five years to pay their attorney fees. Assume that David expects his marginal tax rates to remain constant over the foreseeable future. What is wrong with this strategy?

Accepted Answer

While this plan defers the taxation on h

Question 15

Which of the following is an example of the timing strategy?

Accepted Answer

A) A corporation paying its shareholders a $20,000 dividend. 
B) A parent employing her child in the family business. 
C) A taxpayer gifting stock to his children. 
D) A cash-basis business delaying billing its customers until after year end. 
E) None of these. 
A) A corporation paying its shareholders a $20,000 dividend. 
B) A parent employing her child in the family business. 
C) A taxpayer gifting stock to his children. 
D) A cash-basis business delaying billing its customers until after year end. 
E) None of these.

Question 16

Which of the following is needed to implement the income shifting strategy?

Accepted Answer

A) taxpayers with varying tax rates. 
B) decreasing tax rates. 
C) increasing tax rates. 
D) unrelated taxpayers. 
E) None of these. 
A) taxpayers with varying tax rates. 
B) decreasing tax rates. 
C) increasing tax rates. 
D) unrelated taxpayers. 
E) None of these.

Question 17

Jared, a tax novice, has recently learned of several foreign tax havens (i.e., countries with low tax rates). He is considering locating his manufacturing operations in one of these countries solely based on their low tax rates. What types of taxes is Jared ignoring? Explain how these other taxes may affect the viability of Jared's choice to locate in a foreign tax haven.

Accepted Answer

The concept of implicit taxes suggests t

Question 18

A taxpayer earning income in "cash" and not reporting it as taxable income is an example of:

Accepted Answer

A) tax avoidance. 
B) tax evasion. 
C) conversion. 
D) income shifting. 
E) None of these. 
A) tax avoidance. 
B) tax evasion. 
C) conversion. 
D) income shifting. 
E) None of these.

Question 19

The timing strategy becomes more attractive if a taxpayer is able to accelerate deductions by two or more years (versus one year).

Accepted Answer

A) True 
 B)False

Question 20

If tax rates are decreasing:

Accepted Answer

A) taxpayers should accelerate income. 
B) taxpayers should defer deductions. 
C) taxpayers should defer income. 
D) taxpayers should defer deductions and accelerate income. 
E) None of these. 
A) taxpayers should accelerate income. 
B) taxpayers should defer deductions. 
C) taxpayers should defer income. 
D) taxpayers should defer deductions and accelerate income. 
E) None of these.

Exam 3: Tax Planning Strategies and Related Limitations

When considering cash outflows, higher present values are preferred.

Explain why $1 today is not equal to $1 in the future. Why is understanding this concept particularly important for tax planning? What tax strategy exploits this concept?

Virtually every transaction involves the taxpayer and two other parties that have an interest in the tax ramifications of the transaction.

Danny argues that tax accountants suffer from one-mindedness in their attempts at tax planning (i.e., reducing taxes at all costs). Is Danny's view of tax planning correct - i.e., does he understand what the goal of tax planning is? Please elaborate.

If Joel earns a 10% after-tax rate of return, $10,000 received in two years is worth how much today? (round present and future value amounts to 3 places)

Assume that Larry's marginal tax rate is 25%. If corporate bonds pay 10% interest, what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

Assume that Jose is indifferent between investing in a corporate bond that pays 10% interest and a stock with no growth potential that pays an 8% dividend yield. Assume that the tax rate on dividends is 15%. What is Jose's marginal tax rate?

The constructive receipt doctrine:

If tax rates are decreasing:

Assume that Lavonia's marginal tax rate is 20%. If a city of Tampa bond pays 5% interest, what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

If Julius has a 30% tax rate and a 10% after-tax rate of return, a $40,000 tax deduction in two years will save how much tax in today's dollars? (round present and future value amounts to 3 places)

Which of the following is an example of the timing strategy?

Which of the following is needed to implement the income shifting strategy?

A taxpayer earning income in "cash" and not reporting it as taxable income is an example of:

The timing strategy becomes more attractive if a taxpayer is able to accelerate deductions by two or more years (versus one year).

If tax rates are decreasing:

An Introduction to Tax

Tax Compliance, the Irs, and Tax Authorities

Individual Income Tax Overview, Exemptions, and Filing Status

Gross Income and Exclusions

Individual Deductions

Investments

Individual Income Tax Computation and Tax Credits

Business Income, Deductions, and Accounting Methods

Property Acquisition and Cost Recovery

Property Dispositions

Compensation

Retirement Savings and Deferred Compensation

Tax Consequences of Home Ownership

Entities Overview

Corporate Operations

Accounting for Income Taxes

Corporate Taxation: Nonliquidating Distributions

Corporate Formation, Reorganization, and Liquidation

Forming and Operating Partnerships

Dispositions of Partnership Interests and Partnership Distributions

S Corporations

State and Local Taxes

The Us Taxation of Multinational Transactions

Transfer Taxes and Wealth Planning

Filters