Marketing 4

Mrs. Day structures a transaction to convert income from ordinary income to capital gain. This tax planning strategy may be taking advantage of the: A. Entity variable B. Time period variable C. Jurisdiction variable D. Character variable

D. Character variable

Hilex Inc. structures a transaction to shift income from its California office to its Oregon office. This tax planning strategy may be taking advantage of the: A. Character variable B. Time period variable C. Entity variable D. Jurisdiction variable

D. Jurisdiction variable

In the United States, individuals and corporations are the two entities that pay tax on business income.

true

Sancel Inc. is planning a transaction that will generate $70,000 taxable income and cash inflow. The transaction is structured so that Sancel will receive the cash and report the income this year (year 0). Use Appendix A of your textbook provided to compute the increase in the NPV of the transaction if it can be restructured so that Sancel will receive the cash this year, but report the income two years later (year 2). Sancel's marginal tax rate is 21%, and it uses a 10% discount rate to compute NPV. A. $2,558 B. $1,338 C. $9,622 D. None of the above

A. $2,558 Explanation: NPV under the current structure is $55,300 ($70,000 before-tax cash inflow − $14,700 tax cost). If the tax cost is deferred two years, NPV is $57,858 ($70,000 − [$14,700 × 0.826]) for an increase of $2,558.

Mr. Bearne paid $50,000 to a local spiritual healer and deducted the payment as a business expense of his sole proprietorship. The healer provided personal counseling to Mr. and Mrs. Bearne. Upon audit of the sole proprietorship's accounting records, the IRS agent disallowed the deduction by applying the: A. Business purpose doctrine B. Assignment of income doctrine C. Economic substance doctrine D. Constructive payment doctrine

A. Business purpose doctrine

Carter Inc. and CCC Inc. are owned by the same family. Carter's marginal tax rate is 21%, and CCC's marginal tax rate is 10%. Carter has the opportunity to engage in a transaction that will generate $500,000 taxable cash flow. Alternatively, CCC could engage in the transaction. However, CCC would incur an extra $42,500 deductible cash expense with respect to the transaction. Which of the following statements is true? A. CCC should engage in the transaction to generate $16,750 more after-tax cash flow. B. Carter should engage in the transaction to avoid the extra expense. C. CCC should engage in the transaction because it has the lower marginal tax rate. D. Because Carter and CCC are owned by the same family, the family is indifferent as to which corporation engages in the transaction.

A. CCC should engage in the transaction to generate $16,750 more after-tax cash flow. Explanation: Carter's after-tax cash flow would be $395,000 ($500,000 before-tax cash flow − $105,000 tax cost). CCC's after-tax cash flow would be $411,750 ($457,500 before-tax cash flow − $45,750 tax cost).

Hilex Inc. liquidates its investment in General Electric corporate bonds and reinvests the proceeds in City of Miami municipal bonds. This tax planning strategy may be taking advantage of the: A. Character variable B. Entity variable C. Time period variable D. Jurisdiction variable

A. Character variable

Mrs. Day structures a transaction to shift income from her sole proprietorship to her grandson's business. This tax planning strategy may be taking advantage of the: A. Entity variable B. Time period variable C. Jurisdiction variable D. Character variable

A. Entity variable

Which of the following statements about the time period variable is false? A. If Congress replaced the current progressive income tax rates with a proportionate rate applying to all taxpayers, the time period variable would no longer be a factor in tax planning. B. The time period variable becomes more important as the taxpayer's discount rate for computing NPV increases. C. Tax planning strategies based on the time period variable must involve at least two different taxable years. D. Tax planning strategies based on the time period variable reflect the time value of money.

A. If Congress replaced the current progressive income tax rates with a proportionate rate applying to all taxpayers, the time period variable would no longer be a factor in tax planning.

Mrs. Stout has a $35,000 capital gain eligible for a 28% preferential tax rate. Which of the following statements is false? A. If Mrs. Stout's regular marginal tax rate is 22%, she can elect to recharacterize the capital gain as ordinary income. B. If Mrs. Stout's regular marginal tax rate is 24%, the preferential tax rate has no value to her. C. If Mrs. Stout's regular marginal tax rate is 35%, the preferential tax rate saves her $2,450 in tax. D. None of the above is false.

A. If Mrs. Stout's regular marginal tax rate is 22%, she can elect to recharacterize the capital gain as ordinary income. Explanation: Taxpayers cannot elect to characterize income as ordinary or capital. The characterization is based on statutory law.

Mr. Hayes plans to pay $100,000 for one of three investment alternatives that have the same risk. The income from investment 1 would be taxed at Mr. Hayes' 24% regular tax rate, the income from investment 2 would be taxed at a 15% preferential rate, and the income from investment 3 is tax-exempt. The investments offer the following before-tax yields. Investment 1: 9.0% Investment 2: 7.5% Investment 3: 6.0% Which investment should Mr. Hayes select? A. Investment 1 B. Investment 2 C. Investment 3 D. Mr. Hayes is neutral between investment 2 and investment 3.

A. Investment 1 Explanation: The after-tax yield on investment 1 is 6.84% (9.0% × [1 − 0.24 tax rate]). The after-tax yield on investment 2 is 6.375% (7.5% × [1 − 0.15 tax rate]). The after-tax yield on investment 3 is 6.0%.

Which of the following statements is true? A. Mary Gilly owns 100% of the stock of Gilly Inc. Both Mary and Gilly Inc. are taxpayers under federal law. B. The same rate schedule applies to both individual and corporate taxpayers. C. The tax provisions governing the computation of individual business income are separate and distinct from the tax provisions governing the computation of corporate business income. D. Mary Gilly owns 100% of the stock to Gilly Inc. Both Mary and Gilly Inc. are taxpayers under federal law and the tax provisions governing the computation of individual business income are separate and distinct from the tax provisions governing the computation of corporate business income.

A. Mary Gilly owns 100% of the stock of Gilly Inc. Both Mary and Gilly Inc. are taxpayers under federal law. Explanation: The tax provisions governing the computation of business income are essentially neutral across organizational forms.

Mr. Crum, an architect, billed a client $12,500 for professional services rendered. When Mr. Crum received a check in full payment from the client, he endorsed the check and mailed it to his college-age son, Paul, who cashed it and deposited the $12,500 in his own bank account. Which of the following statements is a correct application of the assignment of income doctrine? A. Mr. Crum must report $12,500 income on his tax return because he earned it. B. Paul must report $12,500 income on his tax return because he received the cash. C. It is illegal for Mr. Crum to transfer the check to Paul. D. Mr. Crum and Paul may decide which one of them reports $12,500 income on his tax return.

A. Mr. Crum must report $12,500 income on his tax return because he earned it.

Which of the following statements about implicit and explicit taxes is false? A. The amount of implicit tax on an investment depends on the owner's marginal tax rate. B. The taxpayer pays an explicit tax to the taxing jurisdiction. C. An investment yielding ordinary income taxed at the regular tax rates should not have an implicit tax. D. None of the above is false.

A. The amount of implicit tax on an investment depends on the owner's marginal tax rate. Explanation: An implicit tax is a reduced before-tax rate of return on a tax-favored investment. The implicit tax is determined by the market and is independent of any one investor's marginal tax rate.

Which of the following statements about tax planning is false? A. The goal of tax planning is tax minimization. B. Tax planning involves structuring transactions to reduce tax costs or increase tax savings. C. Sound tax planning ideas should be entirely legal. D. None of the above is false.

A. The goal of tax planning is tax minimization. Explanation: The goal of tax planning is NPV maximization.

Acme Inc. is planning a transaction that requires a $100,000 deductible cash expenditure. The transaction is structured so that Acme will pay the cash and report the deduction this year (year 0). Use Appendix A of your textbook provided to Compute the increase in the NPV of the transaction if it can be restructured so that Acme will report the deduction this year, but pay the cash three years later (year 3). Acme's marginal tax rate is 21%, and it uses a 7% discount rate to compute NPV. A. $15,928 B. $18,400 C. $21,516 D. None of the above

B. $18,400 Explanation: NPV under the current structure is ($79,000) (($100,000) before-tax cash outflow + $21,000 tax savings). If the cash outflow is deferred three years, NPV is ($60,600) ([($100,000) × 0.816] + $21,000) for an increase of $18,400.

The time period variable reflects the fact that: A. Federal income tax rules are not stable over time. B. A tax dollar paid this year cost more than a tax dollar paid in a future year. C. A taxpayer's marginal rate next year may be more or less than the current marginal rate. D. None of the above

B. A tax dollar paid this year cost more than a tax dollar paid in a future year.

Mr. Erske plans to pay $100,000 for one of three investment alternatives that have the same risk. The income from investment 1 would be taxed at Mr. Erske's 32% regular tax rate, the income from investment 2 would be taxed at a 15% preferential rate, and the income from investment 3 is tax-exempt. The investments offer the following before-tax yields. Investment 1: 8.5% Investment 2: 7.5% Investment 3: 6.0% Which investment should Mr. Erske select? A. Investment 1 B. Investment 2 C. Investment 3 D. Mr. Erske is neutral between investment 2 and investment 3.

B. Investment 2 Explanation: The after-tax yield on investment 1 is 5.78% (8.5% × [1 − 0.32 tax rate]). The after-tax yield on investment 2 is 6.375% (7.5% × [1 − 0.15 tax rate]). The after-tax yield on investment 3 is 6.0%.

Explanation: NPV under the current structure is ($79,000) (($100,000) before-tax cash outflow + $21,000 tax savings). If the cash outflow is deferred three years, NPV is ($60,600) ([($100,000) × 0.816] + $21,000) for an increase of $18,400. A. Mr. Cox should choose transaction A because it generates more before-tax cash flow. B. Mr. Cox should choose transaction A because its NPV exceeds transaction B's NPV. C. Mr. Cox should choose transaction B because the tax cost is deferred one year. D. Mr. Cox should choose transaction B because its NPV exceeds transaction A's NPV.

B. Mr. Cox should choose transaction A because its NPV exceeds transaction B's NPV. Explanation: Transaction A's NPV is $300,000 ($500,000 before-tax cash flow − $200,000 tax cost). Transaction B's NPV is $292,744 ($460,000 before-tax cash flow − $167,256 discounted tax cost [$184,000 × 0.909]).

OWB Inc. and Owin Inc. are owned by the same family. OWB's marginal tax rate is 30%, and Owin's marginal tax rate is 21%. OWB has the opportunity to engage in a transaction that will generate $250,000 taxable cash flow. Alternatively, Owin could engage in the transaction. However, Owin would incur an extra $60,000 deductible cash expense with respect to the transaction. Which of the following statements is true? A. Because OWB and Owin are owned by the same family, the family is indifferent as to which corporation engages in the transaction. B. OWB should engage in the transaction to generate $24,900 more after-tax cash flow. C. OWB should engage in the transaction to avoid the extra expense. D. Owin should engage in the transaction because it has the lower marginal tax rate.

B. OWB should engage in the transaction to generate $24,900 more after-tax cash flow. Explanation: OWB's after-tax cash flow would be $175,000 ($250,000 before-tax cash flow − $75,000 tax cost). Owin's after-tax cash flow would be $150,100 ($190,000 before-tax cash flow − $39,900 tax cost).

Which of the following entities is not a taxable entity for federal income tax purposes? A. Mr. Bob Clark, a U.S. citizen and resident of West Virginia B. PTS Limited, an Arizona partnership C. Confad Inc., an Oklahoma corporation listed on Nasdaq D. All of the above are taxable entities.

B. PTS Limited, an Arizona partnership

Mr. Coomb structured a transfer of real estate to his daughter as a sale. Upon audit, the IRS agent analyzed the economic consequences of the transfer and treated it as a gift by applying the: A. Business purpose doctrine B. Substance over form doctrine C. Assignment of income doctrine D. Step transaction doctrine

B. Substance over form doctrine

which of the following statements about tax legal doctrines is false? A. The scope of the economic substance, business purpose, substance over form, and step transaction doctrines often overlap. B. Taxpayers can invoke the substance over form doctrine to undo the tax consequences of a failed planning strategy. C. The IRS's application of the doctrines is subjective. D. The economic substance, business purpose, substance over form, and step transaction doctrines increase the uncertainty of the tax law.

B. Taxpayers can invoke the substance over form doctrine to undo the tax consequences of a failed planning strategy.

Which of the following statements about tax avoidance and tax evasion is false? A. Tax avoidance is legal, while tax evasion is illegal. B. The difference between avoidance and evasion is clearly defined in the tax law. C. Tax evasion is a federal felony offence. D. Taxpayers should not regard tax avoidance as unethical.

B. The difference between avoidance and evasion is clearly defined in the tax law.

Mrs. Reid made a gift to her 19-year old daughter Susan. Mrs. Reid's marginal tax rate is 35%, and Susan's marginal tax rate is 10%. Which of the following statements is true? A. The gift consisted of a corporate bond that paid $10,000 interest to Susan this year. Even though Susan is the owner of the bond, Mrs. Reid must include the $10,000 in her taxable income. B. The gift consisted of a $2,600 rent check written by tenants who lease a duplex owned by Mrs. Reid. Even though Susan cashed the check, Mrs. Reid must include the $2,600 in her taxable income. C. The gift consisted of a lottery ticket. Six weeks after the gift, the ticket was drawn as a winner. Even though Susan received the $50,000 taxable prize because she was the rightful owner of the ticket, Mrs. Reid must include $50,000 in her taxable income. D. None of the above is true.

B. The gift consisted of a $2,600 rent check written by tenants who lease a duplex owned by Mrs. Reid. Even though Susan cashed the check, Mrs. Reid must include the $2,600 in her taxable income. Explanation: In statements A. and C., Mrs. Reid transferred ownership of the income-producing asset (capital), so the assignment of income doctrine does not apply.

Mrs. Day structures a transaction to shift income from her 20Y1 tax year to her 20Y2 tax year. This tax planning strategy may be taking advantage of the: A. Entity variable B. Time period variable C. Jurisdiction variable D. Character variable

B. Time period variable

Mr. Dole needed to sell appreciated stock out of his investment portfolio to generate cash to pay for his Christmas spending. He decided to postpone the sale from December 20Y1 until January 20Y2. Mr. Dole is taking advantage of the: A. Entity variable B. Time period variable C. Jurisdiction variable D. Character variable

B. Time period variable Explanation: Mr. Dole is deferring the tax cost of the taxable gain on sale from 20Y1 to 20Y2.

A taxpayer who invests in a growth stock rather than a stock that pays an annual dividend is engaging in tax planning based on the: A. Entity variable B. Time period variable C. Jurisdiction variable D. Character variable

B. Time period variable Explanation: The taxpayer will be taxed on any increase in the stock's value in the future year in which the taxpayer sells the stock. Taxpayers recognize dividend income in the year of receipt.

Pratt Company structured an income-generating transaction so that the $750,000 income and cash flow shifted to Pratt's wholly owned subsidiary, PTB Company. If Pratt's marginal tax rate is 21%, and PTB's tax rate is 10%, compute the tax savings from the income shift. A. $157,500 B. $75,000 C. $82,500 D. $78,750

C. $82,500

Bailey Inc. is planning a transaction that requires a $60,000 deductible cash expenditure. The transaction is structured so that Bailey will pay the cash and report the deduction this year (year 0). Use Appendix A of your textbook provided to compute the increase in the NPV of the transaction if it can be restructured so that Bailey will report the deduction this year, but pay the cash three years later (year 3). Bailey's marginal tax rate is 25%, and it uses a 9% discount rate to compute NPV. A. $8,677 B. $9,014 C. $9,480 D. None of the above

C. $9,480 Explanation: NPV under the current structure is ($45,000) (($60,000) before-tax cash outflow + $15,000 tax savings). If the cash outflow is deferred two years, NPV is ($35,520) ([($60,000) × 0.842] + $15,000) for an increase of $9,480.

Which of the following statements about implicit and explicit taxes is false? A. The taxpayer pays an explicit tax to the taxing jurisdiction. B. An investment yielding ordinary income taxed at the regular tax rates should not have an implicit tax. C. Any implicit tax on investment income is always more than the explicit tax on the income. D. An implicit tax reduces the before-tax yield on an investment.

C. Any implicit tax on investment income is always more than the explicit tax on the income. Explanation: An implicit tax can be more or less than an explicit tax on the same income.

Hilex Inc. structures a transaction to shift income from one controlled subsidiary to another controlled subsidiary. This tax planning strategy may be taking advantage of the: A. Jurisdiction variable B. Time period variable C. Entity variable D. Character variable

C. Entity variable

A taxpayer may choose to accept a reduced market rate of return on an investment to take advantage of a tax preference associated with the investment. In such case, the taxpayer will pay a/an: A. Excise tax B. Explicit tax C. Implicit tax D. Transaction tax

C. Implicit tax

The assignment of income doctrine holds that: A. Income from a transaction must be taxed to the person who receives the cash from the transaction. B. Income from a transaction must be taxed to the person who reports the transaction on his or her tax return. C. Income from a transaction must be taxed to the person that earns the income. D. None of the above

C. Income from a transaction must be taxed to the person that earns the income.

Which of the following statements about ordinary income and capital gain is false? A. Every item of income is ultimately characterized as either ordinary income or capital gain for federal tax purposes. B. Most ordinary income items are taxed at the regular individual or corporate tax rates. C. Individuals and corporations pay tax on their capital gains at a preferential rate. D. None of the above is false.

C. Individuals and corporations pay tax on their capital gains at a preferential rate. Explanation: Corporations do not have a preferential tax rate on capital gains.

Mrs. Day structures a transaction to shift income from her New York business to her New Hampshire business. This tax planning strategy may be taking advantage of the: A. Entity variable B. Time period variable C. Jurisdiction variable D. Character variable

C. Jurisdiction variable

NWR Inc. is structuring a transaction that will require a $200,000 deductible cash expenditure. Which of the following structures is the most effective in terms of the time period variable? A. NWR will pay the cash and report the deduction in 20Y1. B. NWR will pay the cash and report the deduction in 20Y2. C. NWR will pay the cash in 20Y2 and report the deduction in 20Y1. D. NWR will pay the cash in 20Y1 and report the deduction in 20Y2.

C. NWR will pay the cash in 20Y2 and report the deduction in 20Y1. Explanation: By accelerating the tax savings from the deduction and deferring the before-tax cash outflow, NWR will minimize NPV.

Nilo Inc. sold an asset to PPQ Partnership, which is unrelated to Nilo. PPQ immediately sold the property to Nilo Western Inc., which is a 100% controlled Nilo subsidiary. The IRS could treat the two sales as one sale of the asset by Nilo to Nilo Western by applying the: A. Economic substance doctrine B. Assignment of income doctrine C. Step transaction doctrine D. Constructive payment doctrine

C. Step transaction doctrine

Which of the following statements about tax deferral is true? A. The value of tax deferral increases as the taxpayer's discount rate for computing NPV decreases. B. Tax deferral is not an effective planning strategy if the taxpayer's marginal tax rate is stable over time. C. The greater the length of time that the payment of a tax is deferred, the less the tax costs in NPV terms. D. Both A. and C. are true.

C. The greater the length of time that the payment of a tax is deferred, the less the tax costs in NPV terms. Explanation: The value of tax deferral increases as the taxpayer's discount rate for computing NPV increases.

The income tax consequences of a business transaction depend on which entity engages in the transaction because: A. The amount of income from the transaction depends on which type of entity engaged in the transaction. B. The transaction may be taxable or nontaxable depending on which type of entity engaged in the transaction. C. The rate at which the income from the transaction is taxed depends on which type of entity engaged in the transaction. D. The character of the income from the transaction depends on which type of entity engaged in the transaction.

C. The rate at which the income from the transaction is taxed depends on which type of entity engaged in the transaction.

Hilex Inc. structures a transaction to shift income from its 20Y0 tax year to its 20Y2 tax year. This tax planning strategy may be taking advantage of the: A. Character variable B. Entity variable C. Time period variable D. Jurisdiction variable

C. Time period variable

Hubern Inc. is planning a transaction that will generate $275,000 taxable income and cash inflow. The transaction is structured so that Hubern will receive the cash and report the income this year (year 0). Use Appendix A of your textbook provided to Compute the increase in the NPV of the transaction if it can be restructured so that Hubern will receive the cash this year, but report the income one year later (year 1). Hubern's marginal tax rate is 21%, and it uses a 9% discount rate to compute NPV. A. $6,276 B. $17,938 C. $4,793 D. None of the above

Correct answer: C Explanation: NPV under the current structure is $217,250 ($275,000 before-tax cash inflow − $57,750 tax cost). If the tax cost is deferred one year, NPV is $222,043 ($275,000 − [$57,750 × 0.917]) for an increase of $4,793.

Which of the following statements about the jurisdiction variable is true? A. Most businesses are subject to the taxing jurisdiction of more than one government. B. For federal purposes, state income taxes are deductible in the computation of taxable income. C. Businesses can often minimize total tax burden by conducting business in jurisdictions with favorable tax climates. D. All of the above statements are true.

D. All of the above statements are true.

The tax law provides that individuals do not pay tax on the first $250,000 of gain realized on the sale of a principal residence. This rule is an example of the: A. Entity variable B. Time period variable C. Jurisdiction variable D. Character variable

D. Character variable Explanation: Gain on sale of a principal residence is taxed at a preferential rate because of the special tax character of the gain.

Which of the following statements about ordinary income and capital gain is true? A. Income characterized as capital gain can have no additional tax characteristics. B. Individuals pay tax on their capital gains at a preferential the same rate as ordinary income. C. Corporations pay tax on both ordinary income at their regular rate and capital gain at their regular a preferential rate. D. Individuals pay tax on their capital gains at a preferential rate and corporations pay tax on both ordinary income and capital gain at their regular rate.

D. Individuals pay tax on their capital gains at a preferential rate and corporations pay tax on both ordinary income and capital gain at their regular rate.

Jelk Company is structuring a transaction that will generate $140,000 taxable revenue and cash inflow. Which of the following structures is the most effective in terms of the time period variable? A. Jelk will receive the cash and report the income in 20Y1. B. Jelk will receive the cash in 20Y2 and report the income in 20Y1. C. Jelk will receive the cash and report the income in 20Y2. D. Jelk will receive the cash in 20Y1 and report the income in 20Y2.

D. Jelk will receive the cash in 20Y1 and report the income in 20Y2. Explanation: By accelerating the before-tax cash inflow and deferring the tax cost of the income, Jelk will maximize NPV.

Mrs. James plans to invest in one of two investment alternatives having the same risk. Investment 1 has a before-tax return of 10% and the income from investment 1 would be taxed at Mrs. James' 35% regular tax rate. Investment 2 has a before-tax return of 8% and the income from investment 2 would be taxed at a 15% preferential rate. Which of the following statements regarding these investment choices is false? A. The after-tax rate of return on investment 1 is 6.5%. B. The after-tax rate of return on investment 2 is 6.8%. C. Investment 2 bears implicit tax relative to investment 1. D. Mrs. James should choose investment 1.

D. Mrs. James should choose investment 1. Explanation: The return on investment 1 is 6.5% (10% * [1 − 35%]). The return on investment 2 is 6.8% (8% * [1 − 15%]).

Mrs. Jax plans to pay $100,000 for one of three investment alternatives that have the same risk. The income from investment 1 would be taxed at Mrs. Jax's 37% regular tax rate, the income from investment 2 would be taxed at a 20% preferential rate, and the income from investment 3 is tax-exempt. The investments offer the following before-tax yields. Investment 1: 8.25% Investment 2: 7.5% Investment 3: 6.0% Which investment should Mrs. Jax select? A. Investment 1 B. Investment 2 C. Investment 3 D. Mrs. Jax is neutral between investment 2 and investment 3.

D. Mrs. Jax is neutral between investment 2 and investment 3. Explanation: The after-tax yield on investment 1 is 5.198% (8.25% × [1 − 0.37 tax rate]). The after-tax yield on investment 2 is 6.0% (7.5% × [1 − 0.20 tax rate]). The after-tax yield on investment 3 is also 6.0%.

Mrs. Lester has the choice between two transactions. Transaction A will generate $175,000 taxable cash flow in the current year (year 0). Transaction B will generate $160,000 cash flow in the current year, but Mrs. Lester will not be required to report $160,000 income for two years (year 2). Mrs. Lester has a 40% marginal tax rate and uses a 9% discount rate to compute NPV. Use Appendix A of your textbook provided to determine which of the following statements is true? A. Mrs. Lester should choose transaction A because it generates more before-tax cash flow than transaction B. B. Mrs. Lester should choose transaction A because its NPV exceeds transaction B's NPV. C. Mrs. Lester should choose transaction B because the tax cost is deferred one year. D. Mrs. Lester should choose transaction B because its NPV exceeds transaction A's NPV.

D. Mrs. Lester should choose transaction B because its NPV exceeds transaction A's NPV. Explanation: Transaction A's NPV is $105,000 ($175,000 before-tax cash flow − $70,000 tax cost). Transaction B's NPV is $106,112 ($160,000 before-tax cash flow − $53,888 discounted tax cost [$64,000 × 0.842]).

Mr. Blau structured an income-generating transaction so that the $90,000 income and cash flow shifted to Mr. Blau's sister, Kim. If Mr. Blau's marginal tax rate is 35%, and Kim's tax rate is 12%, compute the tax savings from the income shift. A. $0 B. $10,800 C. $31,500 D. None of the above

D. None of the above Explanation: The tax savings is $20,700 ($90,000 income × 23% difference in tax rates).

JNC Company structured an income-generating transaction so that the income and cash flow shifted to Juno Inc. Presuming that JNC makes rational decisions, which of the following statements is false? A. JNC and Juno must be related parties that share a mutual economic interest. B. JNC's marginal tax rate is higher than Juno's marginal tax rate. C. The income shift should increase the NPV of the transaction. D. None of the above is false.

D. None of the above is false.

Mrs. Bern's marginal tax rate is 35%, and her grandson Jeff's marginal tax rate is 12%. Which of the following statement is false? A. The family could save 23 cents of tax for every dollar of deduction shifted from Jeff to Mrs. Bern. B. The family could save 23 cents of tax for every dollar of income shifted from Mrs. Bern to Jeff. C. Any income shift from Mrs. Bern to Jeff is constrained by the assignment of income doctrine. D. None of the above is false.

D. None of the above is false.

Which of the following statements about tax strategies is false? A. Tax planners should prefer a simple strategy over a complex strategy. B. Tax planners should prefer a flexible strategy over an inflexible strategy. C. Tax planners should consider the tax consequences of a strategy to all parties. D. None of the above is false.

D. None of the above is false.

Varson Inc. and Vonsell Inc. are owned by the same family. The family decides to purchase $150,000 of deductible advertising that will benefit the businesses operated by both corporations. Which of the following statements is true? A. If Varson's marginal tax rate is higher than Vonsell's marginal tax rate, Vonsell should purchase the advertising to minimize after-tax cost. B. If Varson's marginal tax rate is higher than Vonsell's marginal tax rate, the tax law requires Vonsell to purchase the advertising. C. If Varson's marginal tax rate is higher than Vonsell's marginal tax rate, Varson can claim a $150,000 deduction on its tax return regardless of which corporation purchases the advertising. D. None of the above is true.

D. None of the above is true. Explanation: If Varson's marginal tax rate is higher than Vonsell's marginal tax rate, Varson should purchase the advertising to minimize after-tax cost. Varson cannot deduct the advertising unless it purchases it.

In 20Y1, Ms. Graves transferred appreciated property to KL Partnership in exchange for an ownership interest in the partnership. She deliberately waited until 20Y3 before taking cash out of the partnership. Ms. Graves may have been trying to prevent the IRS from applying the: A. Business purpose doctrine B. Economic substance doctrine C. Substance over form doctrine D. Step transaction doctrine

D. Step transaction doctrine

Which of the following statements about the entity variable is false? A. If Congress replaced the current progressive income tax rates with a proportionate rate applying to all taxpayers, the entity variable would no longer be a factor in tax planning. B. The entity variable becomes more important when Congress increases the progressivity of the income tax. C. Tax planning strategies based on the entity variable must involve at least two different taxpayers. D. Tax planning strategies based on the entity variable must involve some type of income taxed at a preferential rate.

D. Tax planning strategies based on the entity variable must involve some type of income taxed at a preferential rate. Explanation: The entity variable is relevant in a tax system with a progressive rate structure, even if the rates apply to every type of income without regard to any special character of the income.

Tax avoidance is the reduction of a person's tax liability through illegal means.

False

A taxpayer should prefer to pay a $100 implicit tax rather than a $100 explicit tax.

False Explanation: A taxpayer is neutral with respect to paying an identical amount of implicit or explicit tax.

Tax planning strategies to enhance NPV must reflect all four tax planning maxims.

False Explanation: Tax planning strategies to enhance NPV reflect at least one tax planning maxim.

The assignment of income doctrine constrains tax deferral strategies.

False Explanation: The doctrine constrains income-shifting strategies

The entity variable is important because the amount of taxable income generated by a business depends on the type of entity conducting the business.

False Explanation: The entity variable is important because of the different tax rates that apply to different entities.

Deduction-shifting transactions usually occur between unrelated taxpayers.

false

Municipal bond investments bear less implicit tax than investments in taxable corporate bonds.

false

The tax law applies uniformly to every commercial transaction by every business entity.

false

According to the assignment of income doctrine, income must be taxed to the person receiving the cash from an income-generating transaction.

false Explanation: Income must be taxed to the person that renders the service or owns the capital with respect to which the income is paid. The receipt of cash is irrelevant.

The tax character of an item of income depends on how the income is reported on the firm's financial statements.

false Explanation: Tax character is determined strictly by the tax law and has nothing to do with financial reporting.

The business purpose doctrine allows the IRS to collapse a series of intermediate transactions into a single transaction to determine the tax consequences of the arrangement in its entirety.

false Explanation: The sentence defines the step transaction doctrine.

A planning strategy that defers a tax cost without deferring the receipt of before-tax cash flows decreases the NPV of the transaction.

false Explanation: The strategy increases the NPV of the transaction.

The 15% preferential tax rate on capital gains has the same value to every individual taxpayer.

false Explanation: The value of a preferential rate varies with each individual's marginal rate on ordinary income.

The goal of tax planning is to reduce tax costs or increase tax savings as much as possible.

false The goal is to maximize NPV.

Both the individual and the corporate federal income tax rates are progressive.

true

Income-shifting transactions occur more frequently between related parties than between unrelated parties.

true

Opportunity cost refers to the decrease in NPV from a deferral of the receipt of before-tax cash flows.

true

Planning opportunities are created when the tax law applies differentially to alternative business transactions.

true

Tax evasion is a federal crime punishable by imprisonment.

true

The after-tax cost of a dollar of deductible expense to a high-tax entity is less than the after-tax cost to a low-tax entity.

true

The rate at which an item of income is taxed depends on the tax character of the income.

true

The substance over form doctrine allows the IRS to look through the legal formalities of a transaction to determine its true economic nature.

true

The tax character of an item of income can change when Congress amends the tax law.

true

The time period variable is based on the time value of money.

true

A reduced market rate of return on a tax-favored investment is called an implicit tax.

true

A strategy to shift income from one taxpayer to a different taxpayer reflects the entity variable, while a strategy to shift income from one year to a different year reflects the time period variable.

true

Andrea Mitchell can shift income to her daughter, Lynn, by endorsing a check for $10,000 received for a client over to Lynn.

false

Corporations, LLCs, and partnerships are all taxable entities.

false