Tax Accounting Chapter 3

51.If Julius has a 22% 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 (rounded)? A. $4,131 B. $18,775 C. $5,000 D. $25,000 E. None of these

A. $4,131

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 these

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

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 these

A. conversion

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 these

A. implicit taxes

86. The income shifting and timing strategies are examples of: A. tax avoidance B. tax evasion C. illegal taxpayer strategies D. All of these E. None of these

A. tax avoidance

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 these

A. taxpayers with varying tax rates

41. Which of the following strategies is based on the present value of money? A. timing B. tax avoidance C. income shifting D. conversion E. None of these

A. timing

49. If Julius has a 32% tax rate and a 10% after-tax rate of return, a $40,000 tax deduction in two years will save how much tax in todays dollars (rounded)? A. $40,000 B. $10,573 C. $33,040 D. $12,800 E. None of these

B. $10,573

56. Rolandos 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, 2018 and doesnt pick up his check until January 2 nd , 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 these

B. 2018

74. Assume that Johns marginal tax rate is 37%. 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. 37% B. 9.52% C. 6% D. 3.78% E. None of these

B. 9.52%

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 these

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

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 these

B. A parent employing her child in the family business

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 these

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

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 these

B. smaller after-tax rate of return

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 these

B. tax evasion

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 these

B. tax evasion

43. If Joel earns a 10% after-tax rate of return, $10,000 received in two years is worth how much today (rounded)? A. $10,000 B. $9,090 C. $8,260 D. $11,000 E. None of these

C. $8,260

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 these

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

68. Jasons 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, 2018 and has his daughter, Julie, pick up his check on January 2nd , 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 these

C. Jason in 2018

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 these

C. Maximize after-tax wealth

65. A taxpayer instructing her son to collect rent checks for the taxpayers property and to report this as taxable income on the sons 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 these

C. assignment of income doctrine

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 these

C. larger after-tax rate of return

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 these

C. substance-over-form doctrine

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 these

C. taxpayers should accelerate deductions

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 these

C. taxpayers should defer income

50. If Thomas has a 37% tax rate and a 6% after-tax rate of return, $50,000 of income in five years will cost him how much tax in todays dollars (rounded)? A. $50,000 B. $18,500 C. $37,350 D. $13,820 E. None of these

D. $13,820

46. If Scott earns a 12% after-tax rate of return, $15,000 today would be worth how much to Scott in 2 years? A. $15,000 B. $11,955 C. $18,520 D. $18,816 E. None of these

D. $18,816

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 (rounded)? A. $30,000 B. $7,500 C. $28,290 D. $5,940 E. None of these

D. $5,940

44. If Lucy earns a 6% after-tax rate of return, $8,000 received in four years is worth how much today? A. $8,000 B. $7,544 C. $8,989 D. $6,336 E. None of these

D. $6,336

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 Javiers marginal tax rate? A. 50% B. 40% C. 30% D. 20% E. None of these

D. 20%

79. Assume that Lucas marginal tax rate is 32% 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? A. 32% B. 15% C. 8% D. 6.8% E. None of these

D. 6.8%

75. Assume that Larrys marginal tax rate is 24%. 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. 24% B. 12% C. 10% D. 7.6% E. None of these

D. 7.6%

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 these

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

40. Which is not a basic tax planning strategy? A. income shifting B. timing C. conversion D. arms length transaction E. None of these

D. arms length transaction

60. Which of the following is not required to determine the best timing strategy? A. the taxpayers after-tax rate of return B. the taxpayers tax rate this year C. the taxpayers tax rate in future years D. the taxpayers tax rate last year E. None of these

D. the taxpayers tax rate last year

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 these

E. None of these

73. Assume that Bills marginal tax rate is 32%. 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% B. 10.4% C. 8% D. 7% E. None of these

E. None of these

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 Marshas marginal tax rate? A. 50% B. 40% C. 30% D. 20% E. None of these

E. None of these