ch.3

41) 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

51) If Julius has a 20% tax rate and a 10% after-tax rate of return, $25,000 of income in three years will cost him how much tax in today's dollars? Use Exhibit 3.1 in the text. (Round present and future value amounts to 3 places) A) $3,755. B) $18,775. C) $5,000. D) $25,000. E) None of the choices are correct.

a

62) 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

66) 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

72) 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

81) Assume that Shavonne's marginal tax rate is 50% and her tax rate on dividends is 15%. If a corporate bond pays 10.2% interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Shavonne to be indifferent between the two investments from a cash-flow perspective? A) 6%. B) 7%. C) 10.2%. D) 15%. E) None of the choices are correct.

a

84) Assume that Juanita is indifferent between investing in a corporate bond that pays 10.2% interest and a stock with no growth potential that pays a 6% dividend yield. Assume that the tax rate on dividends is 15%. What is Juanita's marginal tax rate? A) 50%. B) 40%. C) 30%. D) 15%. E) None of the choices are correct.

a

86) 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

88) 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

42) 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

49) 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? Use Exhibit 3.1 in the text. (Round present and future value amounts to 3 places) A) $40,000. B) $9,912. C) $33,040. D) $12,000. E) None of the choices are correct.

b

53) 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

55) 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

56) Rolando's employer pays year-end bonuses each year on December 31. Rolando, a cash basis taxpayer, would prefer to not pay tax on his bonus this year. So, he leaves town on December 31, 2016 and doesn't pick up his check until January 2, 2017. When should Rolando report his bonus? A) 2017. B) 2016. C) Rolando can choose the year to report the income. D) it does not matter. E) None of the choices are correct.

b

67) 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

69) 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

70) 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

74) Assume that John's marginal tax rate is 40%. If a city of Austin bond pays 6% interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds? A) 30.00%. B) 10.00%. C) 6.00%. D) 3.60%. E) None of the choices are correct.

b

87) 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

89) 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

38) 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

43) If Joel earns a 10% after-tax rate of return, $10,000 received in two years is worth how much today? Use Exhibit 3.1 in the text. (Round present and future value amounts to 3 places) A) $10,000. B) $9,090. C) $8,260. D) $11,000. E) None of the choices are correct.

c

52) 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

57) 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

58) 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

64) 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

65) 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

68) Jason's employer pays year-end bonuses each year on December 31. Jason, a cash basis taxpayer, would prefer to not 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, 2016 and has his daughter, Julie, pick up his check on January 2, 2017. Who reports the income and when? A) Julie in 2016. B) Julie in 2017. C) Jason in 2016. D) Jason in 2017. E) None of the choices are correct.

c

71) 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

80) 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? A) 15%. B) 10%. C) 9%. D) 7.65%. E) None of the choices are correct.

c

82) Assume that Will's marginal tax rate is 32% and his tax rate on dividends is 15%. If a dividend-paying stock (with no growth potential) pays a dividend yield of 8%, what interest rate must the corporate bond offer for Will to be indifferent between the two investments from a cash-flow perspective? A) 12%. B) 11%. C) 10%. D) 8%. E) None of the choices are correct.

c

83) 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? A) 47%. B) 37%. C) 32%. D) 15%. E) None of the choices are correct.

c

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

d

44) If Lucy earns a 6% after-tax rate of return, $8,000 received in four years is worth how much today? Use Exhibit 3.1 in the text. (Round present and future value amounts to 3 places) A) $8,000. B) $7,544. C) $8,989. D) $6,336. E) None of the choices are correct.

d

46) If Scott earns a 12% after-tax rate of return, $15,000 today would be worth how much to Scott in 2 years? Use Exhibit 3.1 in the text. (Round present and future value amounts to 3 places) A) $15,000. B) $11,955. C) $18,520. D) $18,816. E) None of the choices are correct.

d

47) If Rudy has a 25% tax rate and a 6% after-tax rate of return, a $30,000 tax deduction in four years will save how much tax in today's dollars? Use Exhibit 3.1 in the text. (Round present and future value amounts to 3 places) A) $30,000. B) $7,500. C) $23,760. D) $5,940. E) None of the choices are correct.

d

50) If Thomas has a 40% tax rate and a 6% after-tax rate of return, $50,000 of income in five years will cost him how much tax in today's dollars? Use Exhibit 3.1 in the text. (Round present and future value amounts to 3 places) A) $50,000. B) $20,000. C) $37,350. D) $14,940. E) None of the choices are correct.

d

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

d

60) 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

61) 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

75) 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? A) 25.00%. B) 12.50%. C) 10.00%. D) 7.50%. E) None of the choices are correct.

d

78) Assume that Javier is indifferent between investing in a city of El Paso bond that pays 5% interest and a corporate bond that pays 6.25% interest. What is Javier's marginal tax rate? A) 50%. B) 40%. C) 30%. D) 20%. E) None of the choices are correct.

d

79) 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? A) 30%. B) 15%. C) 8%. D) 6.8%. E) None of the choices are correct.

d

85) If Tom invests $60,000 in a taxable corporate bond that provides a 5 percent before-tax return, how much will Tom's investment be worth in either 8 or 20 years from now when the bond matures? Assume Tom's marginal tax rate is 35 percent. A) $88,647$159,198. B) $92,782 $178,414. C) $79,621 $121,716. D) $77,495 $113,750. E) None of the choices are correct.

d

39) 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

45) If Nicolai earns an 8% after-tax rate of return, $20,000 today would be worth how much to Nicolai in 5 years? Use Exhibit 3.1 in the text. (Round present and future value amounts to 3 places) A) $20,000. B) $13,620. C) $18,520. D) $21,600. E) None of the choices are correct.

e

48) 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

54) 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

63) 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

73) Assume that Bill's marginal tax rate is 30%. If corporate bonds pay 8% interest, what interest rate would a municipal bond have to offer for Bill to be indifferent between the two bonds? A) 30.00%. B) 10.40%. C) 8.00%. D) 7.00%. E) None of the choices are correct.

e

76) 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? A) 20%. B) 8%. C) 7%. D) 4%. E) None of the choices are correct.

e

77) Assume that Marsha is indifferent between investing in a city of Destin bond that pays 6% interest and a corporate bond that pays 8% interest. What is Marsha's marginal tax rate? A) 50%. B) 40%. C) 30%. D) 20%. E) None of the choices are correct.

e