TAX : Midterm -- Chapter questions and quiz questions

Mr. and Mrs. Jerald own a dry cleaning business that generates $125,000 taxable income each year. For the past few years, the couple's federal tax rate on this income has been 32 percent. Congress recently increased the tax rate for next year to 40 percent. c. How much additional revenue will the government collect if Mr. and Mrs. Jerald respond to the rate increase by working less and earning only $110,000 next year?

$110,000 decreased tax base × 40% $ 44,000 Tax collected on original $125,000 base × 32% (40,000) Additional revenue collected from Mr. and Mrs. Jerald. $ 4,000

Mr. and Mrs. Jerald own a dry cleaning business that generates $125,000 taxable income each year. For the past few years, the couple's federal tax rate on this income has been 32 percent. Congress recently increased the tax rate for next year to 40 percent. a. Based on a static forecast, how much additional revenue will the federal government collect from Mr. and Mrs. Jerald next year?

$125,000 tax base (Mr. and Mrs. Jerald's taxable income) × 8% rate increase = $10,000 additional revenue collected from Mr. and Mrs. Jerald.

Mr. and Mrs. Jerald own a dry cleaning business that generates $125,000 taxable income each year. For the past few years, the couple's federal tax rate on this income has been 32 percent. Congress recently increased the tax rate for next year to 40 percent. b. How much additional revenue will the government collect if Mr. and Mrs. Jerald respond to the rate increase by working harder and earning $140,000 next year?

$140,000 increased tax base × 40% $ 56,000 Tax collected on original $125,000 base × 32% (40,000) Additional revenue collected from Mr. and Mrs. Jerald $ 16,000

The city of Springvale imposes a net income tax on businesses operating within its jurisdiction. The tax equals 1% of income up to $100,000 and 1.5% of income in excess of $100,000. The Springvale Bar and Grill generated $782,000 net income this year. Compute its city income tax.

(1% × $100,000) + (1.5% × $682,000) = $11,230.

Government Q imposes a net income tax on businesses operating within its jurisdiction. The tax equals 3% of income up to $500,000 and 5% of income in excess of $500,000. Company K generated $782,000 net income this year. Compute the income tax that Company K owes to Q.

(3% × $500,000) + (5% × $282,000) = $29,100.

Jurisdiction M imposes an individual income tax based on the following schedule. Rate Income bracket 5% $-0- to $50,000 +8% $50,001 to $200,000 +12% $200,001 and above Ms. Owen has $314,000 taxable income. Compute the tax on this income. a. 29,680 b. 28,180 c. 37,680 d. None of the choices are correct

(5% × $50,000) + (8% × $150,000) + (12% × $114,000) = $28,180.

This year, State A raised revenues by increasing its general sales tax rate from 5 percent to 6 percent. Because of the increase, the volume of taxable sales declined from $800 million to $710 million. In contrast, State Z raised revenues from its 5 percent sales tax by expanding the tax base to include certain retail services. The volume of services subject to tax was $50 million. A. Compute the additional revenue raised by State A

2,600,000 solution explained: 8,0000,000 volume of sales before increase * .05 original tax rate = 40,000,000 volume of sales rate increase 710,000,000 * .06 new tax rate = 42,600,000-40,000,000 = 2,600,000

This year, State A raised revenues by increasing its general sales tax rate from 5 percent to 6 percent. Because of the increase, the volume of taxable sales declined from $800 million to $710 million. In contrast, State Z raised revenues from its 5 percent sales tax by expanding the tax base to include certain retail services. The volume of services subject to tax was $50 million. B. Compute the additional revenue raised by State Z.

50,000,000* .05 = 2,500,000

Which of the following is not characteristic of a tax?

A tac is intended to punish unacceptable behavior

Which of the following is Ana example of an activity-based tax?

A tax on business' net income

Which of the following is an earmarked tax?

A tax that generates revenues that the government can spend only to build more National Parks.

Which of the following statements about vertical equity is false?

A tax with a single percentage rate is not vertically equitable.

Acme Incorporated's property taxes increased by $65,000 this year. As a result, Acme increased the sale prices of its products to generate $65,000 more revenue. Who bears the incidence of the corporate tax increase?

Acme's customers.

Government J decides that it must increase its tax revenue. Which of the strategies could result in more revenue?

All of these strategies could result in more revenue for Government J.

Which of the following statements does not describe the classical standard of tax efficiency?

An efficient tax encourages full employment.

Jurisdiction F levies a 10% excise tax on the purchase of golf carts. The annual revenue from this tax averages $800,000 (10% * $8 million average annual golf cart purchases). Jurisdiction F is considering raising the tax rate to 12%. Which of the following statements is true?

Based on a static forecast, the rate increase will increase revenue by $160,000.

Jurisdiction M imposes an individual income tax based on the following schedule. Rate Income bracket 5% $-0- to $50,000 +8% $50,001 to $200,000 +12% $200,001 and above Which of the following statements is true?

Both "The schedule provides no information as to whether Jurisdiction M's tax is horizontally equitable" and "Jurisdiction M's tax is vertically equitable" are true.

The property tax on a rental house owned by Mr. Janey increased by $1,200 this year. Mr. Janey increased the monthly rent charged to his tenant, Ms. Lacey, by $45. Who bears the incidence of the property tax increase?

Both Mr. Janey and Ms. Lacey explanation : Mr. Janey shifted only $540 ($45 × 12 months) of the $1,200 tax increase to Ms. Lacey by increasing her rent.

Carter Incorporated and CCC Incorporated 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?

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).

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:

Character variable

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 these choices are false.

D. None of these choices are false.

A dynamic forecast of the revenue effect of a tax rate change assumes that the tax base does not change. (T/F)

False

A revenue ruling cannot be relied on as authority by any taxpayer other than the taxpayer for whom the ruling was issued. (T/F)

False

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

False

Professional tax research conclusions should always be based on relevant secondary authority. (T/F)

False

Tax research typically occurs as part of the tax compliance process; however, it is rarely important in tax planning. (T/F)

False

The after-tax value of a dollar of income to a high-tax entity is more than the after-tax value to a low-tax entity. (T/F)

False

The federal government is not required to pay interest on the national debt. (T/F)

False

The first step in the tax research process is to locate relevant tax law authority.

False

Firm A has a 21 percent marginal tax rate, and Firm Z has a 28 percent marginal tax rate. Firm A owns a controlling interest in Firm Z. The owners of Firm A decide to incur a $9,500 deductible expense that will benefit both firms. Required: Compute the after-tax cost of the expense assuming that: A. After-Tax Costa. Firm A incurs the expense.

If Firm A incurs the $9,500 expense, the after-tax cost is $7,505 ($9,500 − $1,995 tax savings at 21 percent).

Firm A has a 21 percent marginal tax rate, and Firm Z has a 28 percent marginal tax rate. Firm A owns a controlling interest in Firm Z. The owners of Firm A decide to incur a $9,500 deductible expense that will benefit both firms. b. Firm Z incurs the expense

If Firm Z incurs the $9,500 expense, the after-tax cost is $6,840 ($9,500 − $2,660 tax savings at 28 percent).

Last year, Government G levied a 35% tax on individual income, and Mr. Slate paid $35,000 tax on $100,000 income. This year, the government increased the tax rate to 40%. Which of the following statements is false?

If Mr. Slate took a second job to maintain his after-tax disposable income, this behavior illustrates a substitution effect of the rate increase.

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:

Implicit tax

When analyzing tax authorities, the researcher must decide if the authority requires a factual judgment or an evaluative judgment. The difference between the two can be described as follows:

In making an evaluative judgment, the researcher must draw a subjective conclusion that results in a qualified answer.

The assignment of income doctrine indicates that:

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

Which tax raises the most revenue for the federal government?

Individual income tax

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?

Jelk will receive the cash in 20Y1 and report the income in 20Y2.

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:

Jurisdiction variable

Mr. Dodd resides in a state with a 6% sales and use tax. He recently traveled to another state to buy furniture and paid that state's 4% sales tax. Which of the following statements is true?

Mr. Dodd's use tax liability to his home state equals 2% of the purchase price of the furniture.

Jurisdiction M imposes an individual income tax based on the following schedule. Rate Income bracket 5% $-0- to $50,000 + 8% $50,001 to $200,000 + 12% $200,001 and above Which of the following statements is false? a. If Ms. Lui's taxable income is $33,400, the average tax rate is 5%. b. If Mr. Bell's taxable income is $519,900, the marginal tax rate is 12%. c. If Ms. Vern's taxable income is $188,000, the average tax rate is 7.2%. d. None of the choices are false.

None of the choices are false.

Which of the following statements about horizontal equity is false? a. Horizontal equity focuses on a rational and impartial measurement of the tax base. b. Horizontal equity focuses on the measurement of taxpayers' ability to pay. c. If persons with equal ability to pay a tax owe an equal amount of tax, the tax is horizontally equitable. d. None of these choices are false.

None of these choices are false.

Jurisdiction M imposes an individual income tax based on the following schedule. Rate. Income bracket 5% $-0- to $50,000 +8% $50,001 to $200,000 +12% $200,001 and above Which type of rate structure does this tax use?

Progressive

Which of the following taxes is generally the most significant source of revenue for local governments?

Real property tax

Which of the following is not one of the three sources of authority that comprise the federal tax law?

Secondary authority

Which of the following statements regarding the political process of creating tax law is false?

Special interest groups have little effect on the tax legislative process.

Which of the following is not a primary authority?

Tax textbook

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?

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.

Which of the following statements about tax planning is false?

The goal of tax planning is tax minimization.

The city of Springvale levies a tax on the value of real property located within its city limits. The tax equals 2 percent of the property's assessed value up to $500,000 plus 4 percent of the value in excess of $500,000. B. Compute the tax on real property valued at $725,000.

The property tax is $19,000 ([$500,000 × 2%] + [$225,000 × 4%]).

The city of Springvale levies a tax on the value of real property located within its city limits. The tax equals 2 percent of the property's assessed value up to $500,000 plus 4 percent of the value in excess of $500,000. a. Compute the tax on real property valued at $415,000.

The property tax is $8,300 ($415,000 × 2%).

The income tax consequences of a business transaction depend on which entity engages in the transaction because:

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

When performing step one of the tax research process:

The researcher must take into account the level of the client's tax knowledge.

A static forecast of the incremental revenue from a tax rate increase presumes that:

The tax base will not change because of the rate increase.

A dynamic forecast of the incremental revenue from a tax rate increase presumes that:

The tax rate and the tax base are correlated.

Private letter rulings are authoritative only for the specific taxpayer to whom they are issued and cannot be relied on as authority by any other taxpayer. (T/F)

True

The Internal Revenue Code is the primary source of statutory authority for federal income tax law. (T/F)

True

The federal government does not levy property taxes or general sales tax (T/F)

True

Which of the following statements concerning income tax rate structures is false?

Under a progressive rate structure, the marginal rate and the average rate are equal.

Which of the following statements regarding tax systems is false?

When designing a tax, governments try to identify tac bases that taxpayers can easily avoid or conceal.

Which of the following characterizes a good tax base? a. the base can be easily expressed in monetary terms b. Taxpayers cannot easily avoid or conceal the base c. Taxpayers cannot early move the base from one jurisdiction to another. d. All of these choices characterize a good tax base.

d. All of these choices characterize a good tax base.

Which of the following does not contribute to the dynamic nature of the tax law? a. The political pressure from professional lobbyists b. Changes in the economic and social climate c. Changes in revenue needs of the government d. All of these choices contribute to the dynamic nature of the tax law

d. All of these choices contribute to the dynamic nature of the tax law

Mr. Fox has $100,000 to invest. He could buy corporate bonds with a 10% before-tax yield or tax-exempt bonds with an 8% before-tax yield. Which of the following statements is false? a. If Mr. Fox invests in the tax-exempt bonds, he will pay $2,000 implicit tax every year. b. If Mr. Fox's marginal tax rate is 15%, he should invest in the corporate bonds. c. If Mr. Fox's marginal tax rate is 37%, he should invest in the tax-exempt bonds. d. None of these choices are false.

d. None of these choices are false. explanation : f Mr. Fox's marginal tax rate is 15%, he should invest in the corporate bonds, Mr. Fox's explicit tax is $1,500, which is less than the $2,000 implicit tax on the yield from the tax-exempt bonds. Therefore, he should invest in the taxable bonds. If Mr. Fox's marginal tax rate is 37%, he should invest in the tax-exempt bonds, Mr. Fox's explicit tax is $3,700, which is more than the $2,000 implicit tax. Therefore, he should invest in the tax-exempt bonds

Vervet County levies a real property tax based on the following schedule. Rate. Assessed value 3% $-0- to $250,000 +1%. $250,001 and above Bilex Incorporated owns real property valued at $629,800. Compute Bilex's tax on this property. a. 13,798 b. 7,500 c. 6,298 d. none of the choices are correct

d. none of these choices are correct Bilex's tax is $11,298 ([3% × $250,000] + [1% × $379,800]).

A tax is intended to deter or punish unacceptable behavior.

false

Payment of a tax entitles the payer to a specific good or service from the government (T/F)

false

The person who pays a tax directly to the government always bears the economic incidence of the tax.(T/F)

false

Vervet County levies a real property tax based on the following schedule. Rate Assessed value 3% $-0- to $250,000 + 1% $250,001 and above Which type of rate structure does this tax use?

regressive