TAX CHAPTER 3

D

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

B

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

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

C

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

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

E

Assume that Bills 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% B. 10.4% C. 8% D. 7% E. None of these

D

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

B

Assume that Johns 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% B. 10% C. 6% D. 3.6% E. None of these

C

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 Joses marginal tax rate? A. 47% B. 37% C. 32% D. 15% E. None of these

A

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 Juanitas marginal tax rate? A. 50% B. 40% C. 30% D. 15% E. None of these

C

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? A. 15% B. 10% C. 9% D. 7.65% E. None of these

D

Assume that Larrys 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% B. 12.5% C. 10% D. 7.5% E. None of these

E

Assume that Lavonias 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 these

D

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? A. 30% B. 15% C. 8% D. 6.8% E. None of these

E

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

A

Assume that Shavonnes 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? A. 6% B. 7% C. 10.2% D. 15% E. None of these

C

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? A. 12% B. 11% C. 10% D. 8% E. None of these

B

Assuming a positive interest rate, the present value of money suggests: A. $1 today = $1 in one year B. $1 today GREATER $1 in one year C. $1 today LESS $1 in one year D. $1 today LESS OR = $1 in one year E. None of these

E

Effective tax planning does not require consideration of: 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. None of these

C

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

A

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 (rounded)? A. $3,755 B. $18,775 C. $5,000 D. $25,000 E. None of these

B

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 todays dollars (rounded)? A. $40,000 B. $9,912 C. $33,040 D. $12,000 E. None of these

D

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

E

If Nicolai earns an 8% after-tax rate of return, $20,000 today would be worth how much to Nicolai in 5 years? A. $20,000 B. $13,620 C. $18,520 D. $21,600 E. None of these

D

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

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

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 todays dollars (rounded)? A. $50,000 B. $20,000 C. $37,350 D. $14,940 E. None of these

C

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

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

D

If tax rates are increasing: A. taxpayers should accelerate income B. taxpayers should defer deductions C. taxpayers should defer income D. you need more information to make a recommendation E. None of these

A

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

C

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, 2014 and has his daughter, Julie, pick up his check on January 2 nd , 2015. Who reports the income and when? A. Julie in 2014 B. Julie in 2015 C. Jason in 2014 D. Jason in 2015 E. None of these

B

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

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, 2014 and doesnt pick up his check until January 2 nd , 2015. When should Rolando report his bonus? A. 2015 B. 2014 C. Rolando can choose the year to report the income D. It does not matter E. None of these

B

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 these

C

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

A

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

B

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

E

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

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 these

C

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

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

B

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

A

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

D

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

B

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

A

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

D

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

A

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

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