Tax Research Chapter 12

The first requirement for effective tax planning is awareness on the part of decision-makers.

True

The judicial doctrine "business purpose" can decrease the taxpayer's ability to employ effective planning techniques.

True

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

True

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

True

When tax rates are constant, delaying income recognition or accelerating deductions can be beneficial.

True

Whenever a series of transactions results in significant tax savings, the IRS may attempt to apply the concept of substance over form by collapsing several transactions into one.

True

A proportional tax rate system represents:

A flat tax rate structure

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

A tax on income

Jane owns land adjacent to her home that appreciated in value by $5,000 this year. She acquired the land five years ago for $25,000. Based on these facts alone, the amount that would be included in her taxable income for the current year is:

$0

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

Decreases as the tax base grows larger

For 2013, the amount of exemption that a child can enjoy on any interest, dividends or capital gains income is limited to:

$1,000

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

A. It allows the tax professional to exercise a higher degree of creativity. B. It forces the client to identify financial goals and general means by which to achieve them. C. Affords the practioner the greatest possible degree of control over the prescribed transactions and the tax consequences.

Where ATC = after-tax cost, BTC = before-tax cost, and MTR = marginal tax rate, the after-tax cost of tax planning can be expressed as

ATC=BTC X (1-MTR)

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

Increases as the tax base grows larger

Tax planning:

Is a completely legal means for saving taxes

The tax rate that is the present value of the additional tax on one dollar of additional taxable income is referred to as the:

Marginal tax rate

Jeffery Heinz, a salaried person, incurred a loss of $4,000 from passive activities. This loss can be applied as a deduction to offset taxable income from:

Passive activities

Which of the following tax rate systems is applicable to the US individual income tax?

Progressive tax rate system

Most sales and property taxes in the US employ a:

Proportional rate structure

Social Security Taxes are considered:

Regressive

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

Tax Liability = Tax Base X Tax Rate

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

The Federal income tax itself is not allowed as a deduction in determining taxable income.

Spreading income among related taxpayers is one of the goals of tax planning behavior.

True

Taxpayers are rewarded more for finding ways to save taxes than for earning an equal amount in the marketplace.

True

The "kiddie" tax was created to prevent parents from sheltering income by putting accounts in the names of their lower-taxed children.

True

The effective average tax rate can be found by dividing the total tax liability by the economic income.

True

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

changing the timing of recognition of taxable income

What is the age at which children who are not full time students are no longer subject to the "kiddie" tax?

19

The tax rate which is computed by simply dividing the total tax liability by the corresponding tax base is known as the:

Average tax rate

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

Avoiding income recognition

Taxpayers can legally reduce their exposure to taxation by:

Avoiding the recognition of taxable income

Which of the following are two pervasive judicial doctrines that often limit the taxpayer's ability to employ effective planning techniques?

Business purpose and substance over form

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

Changing tax jurisdictions

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

Changing the character of income

Any business-related expenses that are incurred in connection with the determination of a tax are not deductible.

False

Investment expenses can offset ordinary income.

False

Tax planning analyses should be based on the average tax rates that the individual will pay or save by adopting a particular course of action.

False

Taxpayers can always minimize their tax liability simply by moving income and assets out of one jurisdiction to another.

False

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

False

With regard to employers, generally, salary payments to employees are deductible but fringe benefits are not.

False

With respect to tax-planning activities, the decision maker must compare the after-tax benefits with the pre-tax costs.

False