Question 1

What is a statutory tax trap? Give an example.

Accepted Answer

Statutory tax traps are rules designed by Congress toprevent certain techniques of tax avoidance. For example, Section 482 of the Internal Revenue Code gives the IRS the power toreallocate both income and deductions among related companies toreflect "true taxable income." Under that section, the IRS may make an allocation of income from one foreign subsidiary toanother foreign subsidiary of a U.S. multinational corporation toreflect the market value of services provided by one subsidiary tothe other. The IRS will make this allocation if the subsidiary providing the services does not charge market value for those services.

Question 2

Taxpayers can use the step-transaction doctrine toobtain various tax advantages.

Accepted Answer

A) True 
 B)False  False

Question 3

Tax planning:

Accepted Answer

A)  is a completely legal means for saving taxes
B)  is the same as tax evasion
C)  endeavors tounderstate the taxpayer's real wealth
D)  all of these are correct A

Question 4

Under a progressive tax rate system, the applicable tax rate:

Accepted Answer

A)  is applied against the taxpayer's net holdings of tangible assets
B)  decreases as the tax base grows larger
C)  increases as the tax base grows larger
D)  is independent of the tax base

Question 5

Most sales and property taxes in the United States employ a:

Accepted Answer

A)  proportional rate structure
B)  regressive rate structure
C)  progressive rate structure
D)  consumption rate structure

Question 6

The progressive nature of the tax system tends toincrease the advantage of income splitting.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following is the basic formula for computing a taxpayer's tax liability?

Accepted Answer

A)  Tax Liability = Tax Base ÷ Tax Rate
B)  Tax Liability = Tax Base × (1 - Tax Rate) 
C)  Tax Liability = Tax Base × Tax Rate
D)  None of these are correct

Question 8

Tax planning has been said tooffer an opportunity for the most psychologically and financially rewarding work in tax practice. What is it about tax planning that would lead one tothis conclusion?

Accepted Answer

The answer of Tax planning has been said tooffer an...

Question 9

Which of the following is a feature of a properly accomplished tax planning?

Accepted Answer

A)  It allows the tax professional toexercise a higher degree of creativity.
B)  It forces the client toidentify financial goals and general means by which toachieve them.
C)  It affords the practitioner the greatest possible degree of control over the prescribed transactions and the tax consequences.
D)  All of these are correct.

Question 10

Investing in non-dividend-paying stock that is expected toappreciate yearly by 5 percent instead of investing in 5 percent corporate bonds is an example of tax planning by:

Accepted Answer

A)  spreading income through portfoliodiversification
B)  avoiding income recognition
C)  changing the timing of recognition of taxable income
D)  changing the character of income

Question 11

Under a regressive tax rate structure, the applicable tax rate:

Accepted Answer

A)  increases as the tax base grows larger
B)  remains unchanged irrespective of the level of the tax base
C)  best reflects the capacity of the taxpayer topay
D)  decreases as the tax base grows larger

Question 12

Whenever a series of transactions results in significant tax savings, the IRS may attempt toapply the concept of substance over form by collapsing several transactions intoone.

Accepted Answer

A) True 
 B)False

Question 13

a)Michael formed a new corporation by investing $200,000 cash. Following the advice of his tax consultant, Michael designated $120,000 tobe used for the purchase of corporate stock and $80,000 as a loan tothe corporation. What tax advantage does this arrangement have over structuring the entire investment as a purchase of stock? Explain. 
b)Dorothy has $30,000 toinvest and is considering a corporate bond that pays 7 percent annual interest or a non-dividend-paying stock that is expected toappreciate by 7 percent each year. Given that both investments are of similar risk, and the long-term capital gains tax rate is lower than the ordinary income tax rate, which option should Dorothy choose? Why? 
c)Gabriel is the sole shareholder of a management-consulting corporation. In addition, he has invested in passive rental activities that generate $20,000 per year in passive losses. According tothe Code, such losses from passive activities cannot be applied as deductions tooffset other types of taxable income. Advise Gabriel as tohow he can salvage the $20,000 deduction.

Accepted Answer

The answer of a)Michael formed a new corporation by investing...

Question 14

Which of the following tax law rules creates incentives for tax planning?

Accepted Answer

A)  The federal income tax itself is deductible in determining taxable income.
B)  Reducing the amount of income tax that is paid decreases a taxpayer's allowable deductions.
C)  The federal income tax itself is not allowed as a deduction in determining taxable income.
D)  None of these are correct.

Question 15

Which of the following is the most common tax that is found in contemporary industrialized societies?

Accepted Answer

A)  a tax on consumption
B)  a proportional tax
C)  a tax on income
D)  none of these are correct

Question 16

Choosing tax-free fringe benefits instead of an equivalent hike in salary is an example of tax planning by:

Accepted Answer

A)  accelerating income recognition
B)  changing the timing of recognition of taxable income
C)  avoiding income recognition
D)  all of these are correct

Question 17

Often, by moving assets or income out of one government authority into another, tax reductions can be affected. This process is called:

Accepted Answer

A)  changing the timing of recognition of income
B)  changing the timing of recognition of deductions
C)  deferring the payment of tax
D)  changing tax jurisdictions

Question 18

Under a proportional tax rate system, the tax rate is constant.

Accepted Answer

A) True 
 B)False

Question 19

Allowing an investment toincrease in value without selling it is an example of tax planning by:

Accepted Answer

A)  changing the timing of recognition of taxable income
B)  changing the character of income
C)  spreading income among related parties
D)  none of these are correct

Question 20

Identify the five goals of tax planning behavior and give an example of each.

Accepted Answer

The answer of Identify the five goals of tax planning...

Exam 11: Tax Planning

What is a statutory tax trap? Give an example.

Taxpayers can use the step-transaction doctrine toobtain various tax advantages.

Tax planning:

Under a progressive tax rate system, the applicable tax rate:

Most sales and property taxes in the United States employ a:

The progressive nature of the tax system tends toincrease the advantage of income splitting.

Which of the following is the basic formula for computing a taxpayer's tax liability?

Tax planning has been said tooffer an opportunity for the most psychologically and financially rewarding work in tax practice. What is it about tax planning that would lead one tothis conclusion?

Which of the following is a feature of a properly accomplished tax planning?

Investing in non-dividend-paying stock that is expected toappreciate yearly by 5 percent instead of investing in 5 percent corporate bonds is an example of tax planning by:

Under a regressive tax rate structure, the applicable tax rate:

Whenever a series of transactions results in significant tax savings, the IRS may attempt toapply the concept of substance over form by collapsing several transactions intoone.

Which of the following tax law rules creates incentives for tax planning?

Which of the following is the most common tax that is found in contemporary industrialized societies?

Choosing tax-free fringe benefits instead of an equivalent hike in salary is an example of tax planning by:

Often, by moving assets or income out of one government authority into another, tax reductions can be affected. This process is called:

Under a proportional tax rate system, the tax rate is constant.

Allowing an investment toincrease in value without selling it is an example of tax planning by:

Identify the five goals of tax planning behavior and give an example of each.