tax chapter 3
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