tax chapter 3

Which of the following is an example of the timing strategy? A) A cash-basis taxpayer paying all outstanding bills by year-end. B) A parent employing her child in the family business. C) A business paying its owner a $30,000 salary. D) A taxpayer investing in a tax-preferred investment. E) None of the choices are correct.

A) A cash-basis taxpayer paying all outstanding bills by year-end.

Which of the following may limit the conversion strategy? A) Implicit taxes. B) Assignment of income doctrine. C) Constructive receipt doctrine. D) Activities with preferential tax rates. E) None of the choices are correct.

A) Implicit taxes.

Which of the following is needed to implement the income-shifting strategy? A) Taxpayers with varying tax rates. B) Decreasing tax rates. C) Increasing tax rates. D) Unrelated taxpayers. E) None of the choices are correct.

A) Taxpayers with varying tax rates.

Investing in municipal bonds to avoid paying tax on interest earned and to earn a higher after-tax yield is an example of: A) conversion. B) tax evasion. C) timing. D) income shifting. E) None of the choices are correct.

A) conversion.

The income-shifting and timing strategies are examples of: A) tax avoidance. B) tax evasion. C) illegal taxpayer strategies. D) All of the choices are correct. E) None of the choices are correct.

A) tax avoidance.

Which of the following tax planning strategies is based on the present value of money? A) timing. B) tax avoidance. C) income shifting. D) conversion. E) None of the choices are correct.

A) timing.

Assuming a positive interest rate, the present value of money suggests: A) $1 today = $1 in one year. B) $1 today > $1 in one year. C) $1 today < $1 in one year. D) $1 today ≤ $1 in one year. E) None of the choices are correct.

B) $1 today > $1 in one year.

Rolando's employer pays year-end bonuses each year on December 31. Rolando, a cash-basis taxpayer, would prefer not to pay tax on his bonus this year. So, he leaves town on December 31, 2018, and doesn't pick up his check until January 2, 2019. When should Rolando report his bonus? A) 2019. B) 2018. C) Rolando can choose the year to report the income. D) it does not matter. E) None of the choices are correct.

B) 2018.

Which of the following is an example of the income-shifting strategy? A) A corporation paying its shareholders a $20,000 dividend. B) A corporation paying its owner a $20,000 salary. C) A high tax rate taxpayer investing in tax-exempt municipal bonds. D) A cash-basis business delaying billing its customers until after year-end. E) None of the choices are correct.

B) A corporation paying its owner a $20,000 salary.

Which of the following is more likely to receive IRS scrutiny under the assignment of income doctrine? 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 the choices are correct.

B) A parent employing her child in the family business.

Which of the following decreases the benefits of accelerating deductions? A) Decreasing tax rates. B) Smaller after-tax rate of return. C) Larger after-tax rate of return. D) Larger magnitude of transactions. E) None of the choices are correct.

B) Smaller after-tax rate of return.

The constructive receipt doctrine: 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 the choices are correct.

B) causes income to be recognized before it is actually received.

A common income-shifting strategy is to: A) shift income from low tax rate taxpayers to high tax rate taxpayers. B) shift deductions from low tax rate taxpayers to high tax rate taxpayers. C) shift deductions from high tax rate taxpayers to low tax rate taxpayers. D) accelerate tax deductions. E) None of the choices are correct.

B) shift deductions from low tax rate taxpayers to high tax rate taxpayers.

A taxpayer earning income in "cash" and not reporting it as taxable income is an example of: A) tax avoidance. B) tax evasion. C) conversion. D) income shifting. E) None of the choices are correct.

B) tax evasion.

Paying "fabricated" expenses in high tax rate years is an example of: A) conversion. B) tax evasion. C) timing. D) income shifting. E) None of the choices are correct.

B) tax evasion.

Which of the following is an example of the conversion strategy? A) A corporation paying its shareholders a $20,000 dividend. B) A corporation paying its owner a $20,000 salary. C) A high tax rate taxpayer investing in tax exempt municipal bonds. D) A cash-basis business delaying billing its customers until after year end. E) None of the choices are correct.

C) A high tax rate taxpayer investing in tax exempt municipal bonds.

A taxpayer instructing her son to collect rent checks for the taxpayer's property and to report this as taxable income on the son's tax return violates which doctrine? A) Constructive receipt doctrine. B) Implicit tax doctrine. C) Assignment of income doctrine. D) Step-transaction doctrine. E) None of the choices are correct.

C) Assignment of income doctrine.

Jason's employer pays year-end bonuses each year on December 31. Jason, a cash-basis taxpayer, would prefer not to pay tax on his bonus this year (and actually would prefer his daughter to pay tax on the bonus). So, he leaves town on December 31, 2018, and has his daughter, Julie, pick up his check on January 2, 2019. Who reports the income and when? A) Julie in 2018. B) Julie in 2019. C) Jason in 2018. D) Jason in 2019. E) None of the choices are correct.

C) Jason in 2018.

Which of the following increases the benefits of income deferral? A) Increasing tax rates. B) Smaller after-tax rate of return. C) Larger after-tax rate of return. D) Smaller magnitude of transactions. E) None of the choices are correct.

C) Larger after-tax rate of return.

A taxpayer paying his 10-year-old daughter $50,000 a year for consulting likely violates which doctrine? A) Constructive receipt doctrine. B) Implicit tax doctrine. C) Substance-over-form doctrine. D) Step-transaction doctrine. E) None of the choices are correct.

C) Substance-over-form doctrine.

The goal of tax planning generally is to: A) minimize taxes. B) minimize IRS scrutiny. C) maximize after-tax wealth. D) support the federal government. E) None of the choices are correct.

C) maximize after-tax wealth.

If tax rates are decreasing: 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 the choices are correct.

C) taxpayers should accelerate deductions.

If tax rates are decreasing: 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 the choices are correct.

C) taxpayers should defer income.

Which of the following is an example of the timing strategy? 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 the choices are correct.

D) A cash-basis business delaying billing its customers until after year-end.

Which is not a basic tax planning strategy? A) Income shifting. B) Timing. C) Conversion. D) Arm's length transaction. E) None of the choices are correct.

D) Arm's length transaction.

Which of the following is not required to determine the best timing strategy? A) The taxpayer's after-tax rate of return. B) The taxpayer's tax rate this year. C) The taxpayer's tax rate in future years. D) The taxpayer's tax rate last year. E) None of the choices are correct.

D) The taxpayer's tax rate last year.

If tax rates are increasing: A) taxpayers should accelerate income. B) taxpayers should defer deductions. C) taxpayers should defer income. D) you need more information to make a recommendation. E) None of the choices are correct.

D) you need more information to make a recommendation.

If Jim invested $100,000 in an annual dividend-paying stock today with a 7 percent return, what investment time period will give Jim the greatest after-tax return? A) 1 year. B) 5 years. C) 10 years. D) 20 years. E) All yield the same after-tax return.

E) All yield the same after-tax return.

Which of the following does not limit the benefits of deferring income? A) Increasing tax rates. B) A taxpayer with severe cash flow needs. C) If continuing an investment would generate a low rate of return. D) If continuing an investment would subject the taxpayer to unnecessary risk. E) None of the choices are correct.

E) None of the choices are correct.

Which of the following does not limit the income-shifting strategy? A) Assignment of income doctrine. B) Business purpose doctrine. C) Substance-over-form doctrine. D) Step-transaction doctrine. E) None of the choices are correct.

E) None of the choices are correct.

Effective tax planning requires all of these considerations except: A) nontax factors. B) the taxpayer's tax costs of alternative transactions. C) the other party's tax costs of alternative transactions. D) the other party's nontax costs of alternative transactions. E) all of the choices are required considerations.

E) all of the choices are required considerations.

Future value can be computed as Future Value = Present Value/(1 + r)n.

FALSE

If tax rates will be higher next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.

FALSE

If tax rates will be higher next year, taxpayers should defer their income to next year regardless of their after-tax rate of return.

FALSE

In general, tax planners prefer to defer income. This is an example of the conversion strategy.

FALSE

Investors must consider complicit taxes as well as explicit taxes in order to make correct investment choices.

FALSE

Nontax factors do not play an important role in tax planning.

FALSE

Paying dividends to shareholders is one effective way of shifting income from a corporation to its shareholders.

FALSE

Tax evasion is a legal activity that forms the basis of the basic tax planning strategies.

FALSE

The assignment of income doctrine is a natural limitation to the timing strategy.

FALSE

The constructive receipt doctrine is a natural limitation for the conversion strategy.

FALSE

The downside of tax avoidance includes the potential of stiff monetary penalties and imprisonment.

FALSE

The goal of tax planning is tax minimization.

FALSE

The timing strategy becomes more attractive as tax rates decrease.

FALSE

The timing strategy is based on the idea that the location of where the income is taxed affects the tax costs of the income.

FALSE

The value of a tax deduction is higher for a taxpayer with a lower tax rate.

FALSE

When considering cash outflows, higher present values are preferred.

FALSE

An investment's time horizon does not affect after-tax rates of return on investments taxed annually.

TRUE

Assuming an after-tax rate of return of 10 percent, John should prefer to pay an expense of $85 today instead of an expense of $100 in one year. Use Exhibit 3.1.

TRUE

If tax rates will be lower next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.

TRUE

Implicit taxes may reduce the benefits of the conversion strategy.

TRUE

In general, tax planners prefer to accelerate deductions.

TRUE

One limitation of the timing strategy is the difficulties in accelerating a tax deduction without accelerating the actual cash outflow that generates the tax deduction.

TRUE

Tax avoidance is a legal activity that forms the basis of the basic tax planning strategies.

TRUE

Tax savings generated from deductions are considered cash inflows.

TRUE

The business purpose, step-transaction, and substance-over-form doctrines may limit the conversion strategy.

TRUE

The business purpose, step-transaction, and substance-over-form doctrines may limit the income-shifting strategy.

TRUE

The concept of present value is an important part of the timing strategy.

TRUE

The constructive receipt doctrine is more of an issue for cash-basis taxpayers.

TRUE

The conversion strategy capitalizes on the fact that tax rates vary across different activities.

TRUE

The income-shifting strategy requires taxpayers with varying tax rates.

TRUE

The present value concept becomes more important as interest rates increase.

TRUE

The time value of money suggests that $1 one year from now is worth less than $1 today.

TRUE

The timing strategy becomes more attractive as interest rates (i.e., rates of return) increase.

TRUE

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

TRUE

The timing strategy is particularly effective for cash-basis taxpayers.

TRUE

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

TRUE

When considering cash inflows, higher present values are preferred.

TRUE