tax

Which of the following statements regarding the time period variable are false? (Select all that apply.)

-If Congress replaced the current tax structure with a proportionate rate structure, time period would no longer be relevant in tax planning. -The time period variable becomes less important as the taxpayer's discount rate increases.

Income shifting techniques ______. (Select all that apply.)

-result in reduced tax revenues for the government -are more easily arranged between related parties -may be disallowed if there is no business purpose other than tax avoidance

Which of the following statements best describes implicit and explicit taxes?

An explicit tax is the tax paid to the taxing jurisdiction.

Mr. Wolfe has $100,000 to invest. He could buy corporate bonds with an 8% rate of return or municipal bonds with a 6% rate of return. If Mr. Wolfe invests in the municipal bonds, his implicit tax is $.

Blank 1: 2000 or 2,000

Josh has the opportunity to engage in a transaction that provides an immediate cash inflow, but defers the tax on that cash for several years. Which of the following statements best reflects the uncertainty inherent in this transaction?

The benefit of deferral of the tax may be offset by unanticipated increases in statutory tax rates.

Which of the following statements regarding the U.S. federal income tax structures are correct? (Select all that apply.)

The individual income tax structure has multiple tax brackets. The individual income tax structure is progressive. The corporate income tax structure is proportionate.

Which of the following types of income are subject to a preferential rate? (Select all that apply.)

Interest from municipal bonds Capital gains

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

Opportunity

The time period variable reflects the fact that ______.

a tax dollar paid today costs more in present value terms than a tax dollar paid in the future

Jeremy decided to liquidate his investment in Plaka Corporation bonds. He reinvested the proceeds in City of Arlington municipal bonds. This tax planning strategy may be taking advantage of the ______.

character variable

A tax system that is is uniformly applied to every taxpayer and every transaction.

neutral

James sold an investment for $100,000 that he originally purchased for $80,000. Because he held the investment for 5 years, the gain qualifies for a 15% preferential rate. His marginal tax rate on ordinary income is 25%. The tax savings from the preferential rate is $.

2000

YaBlue Company is structuring a transaction that will generate $1 million in taxable revenues and cash inflow. Which of the following structures is most effective in terms of the time period variable?

YaBlue will receive the cash in the current year and report the related taxable income in the following year.

In the U.S., and are the two primary entities that pay tax on business income.

individuals corporations

Hillmer Corporation structures a transaction to shift income from its New York City office to its Dallas office. This tax planning strategy may be taking advantage of the ______.

jurisdiction variable

In anticipation of a new 3.8% Medicare tax on investment income, Katie has decided to liquidate several of her investments before the effective date. This strategy may be an example of tax planning using the ______.

time period variable

Elizabeth is planning to invest $10,000 and is considering two alternatives: Alternative 1: City of Austin Municipal Bond yielding 5% interest Alternative 2: BBB Corporation bond yielding 8% interest Assuming she has a 25% marginal tax rate on ordinary income, the after-tax rate of return on the City of Austin Bond is % and the after-tax rate of return on the BBB Corporate bond is %.

Blank 1: 5 Blank 2: 6

Binder Corp is subject to a 15% marginal tax rate. Clipper Corp is subject to a 21% marginal tax rate. Binder is the parent corporation of Clipper. They are jointly considering a $100,000 expenditure that will benefit both corporations. The after-tax cost of the expenditure is $ if Binder incurs the cost and $ if Clipper incurs the cost. According to this analysis, Corp should incur the cost.

Blank 1: 85,000 Blank 2: 79,000 Blank 3: Clipper

Every income item is ultimately characterized as or .

Blank 1: ordinary or ordinary income Blank 2: capital, capital gain, or capital gains

C Corp has two subsidiaries, B Corp and D Corp. Assume the three entities have the following marginal tax rates: C Corp (36%) D Corp (21%) B Corp (10%) The related group is contemplating an expenditure that any of the entities could logically undertake. An effective tax planning strategy, using the entity variable, might be to shift deductions to ______ Corp and taxable income to ______ Corp.

C; B Reason: The entity variable would suggest shifting deductions to the highest marginal tax rate entity (C) and income to the lowest (B).

Crisco Company is contemplating a significant deductible expenditure. Which of the following structures for the expenditure is most effective in terms of the time period variable?

Crisco will report the deduction in the current year and pay the cash in the following year.

Ms. Paltrow structures a transaction to legally shift income from her sole proprietorship to her son's business. Which of the following terms best identifies the tax planning variable that she is likely utilizing?

Entity variable

True or false: Opportunity cost refers to the increase in NPV resulting from a deferral of the receipt of before--tax cash flows.

False

True or false: The economic substance 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 Reason: This statement reflects the step transaction doctrine.

Which of the following strategies reflect tax planning using the character variable? (Select all that apply.)

Holding an investment for longer than one year, so the resulting gain will be taxed as capital gains rather than ordinary income Investing in municipal bonds

Mr. Silver made a gift to his 20-year old son, Hunt. The gift consisted of 100 shares of Giggle stock. Mr. Silver's marginal tax rate is 37% and Hunt's marginal tax rate is 12%. Which of the following statements is true?

Hunt must include the dividend income in his taxable income.

Which of the following reflect tax characterizations in the U.S. tax structure? (Select all that apply.)

Income generated by a multinational firm can be described as "U.S.-sourced" or "foreign-sourced" income. Tax-exempt municipal bond interest is interest from bonds issued from a local government.

Which of the following statements is false regarding income and deduction shifting?

Income shifting is illegal regardless of whether the underlying transaction has a genuine business purpose.

Which of the following factors could offset any benefit derived from deferring the taxability of a current cash inflow? (Select all that apply.)

Increases to the taxpayer's marginal tax rate Increases to statutory tax rates

Which of the following is not a taxable entity for U.S. federal income tax purposes?

Partnership

Match the doctrine with the example that best illustrates it.

Substance over form doctrine- The Joiners have a daughter attending college in Miami. They own an advertising business in LA. They have asked the controller to send a monthly paycheck from the business to their daughter. The daughter performs no services for the advertising business. Upon audit, the IRS disallows the company's compensation deduction and reclassifies the payment as a dividend to the Joiners and a subsequent gift to the daughter. Step transaction doctrine- First Corp. sold an asset to an unrelated company, Next Corp. Next Corp. immediately sold the asset to Final Corp. which is a controlled subsidiary of First Corp. Upon audit, the IRS collapsed the two sales into one sale for tax purposes, First Corp to Final Corp. Business purpose doctrine- The Halls were denied a deduction for the cost of a trip to the Caymans. The IRS held that the trip was a vacation and there was no evidence that the reason for the trip was to attend a professional conference.

Match the term with the statement that best describes it.

Tax evasion- Illegal means of reducing taxes Tax planning- The structuring of transactions through legal means to effect tax costs or savings and maximize the NPV Tax avoidance- Legitimate means of reducing taxes

Which of the following statements about tax planning is false?

The difference between tax avoidance and tax evasion is clearly defined in the tax law. Reason: Because the tax law cannot be written to address every possible circumstance, ambiguities exist and it is not always clear whether an action constitutes avoidance or evasion.

Which of the following statements about the character variable is true?

The tax character of income is determined strictly by tax law.

A taxpayer may accept a reduced before-tax rate of return on a tax-favored asset. As a result, the taxpayer will accept a(n) tax on the investment.

implicit

In present value terms, tax costs ______ and cash flows ______ when income is shifted to a ______ taxed time period.

increase; decrease; higher

The tax law contains a provision that excludes from taxation up to $250,000 of gain (for a single taxpayer) on the sale of the personal residence. Among other things, the law requires that the home serve as the personal residence of the taxpayer for a specific period of time prior to the sale. If John delayed the sale of his home to meet this requirement, it may be an example of tax planning using the ______.

character variable

Cash flows ______ when deductions are shifted to a ______ taxed jurisdiction.

decrease; higher increase; lower

Tax costs ______ and cash flows ______ when income is taxed at a preferential rate because of its character.

decrease; increase

Tax costs ______ and cash flows ______ when income is shifted to a ______ taxed entity.

decrease; increase; lower

Tax costs ______ and cash flows ______ when taxable income is shifted to an entity subject to a ______ tax rate.

decrease; increase; lower

The assignment of income doctrine holds that income from a transaction must be taxed to the person who ______.

earns the income

The variable is illustrated by tax planning around differences in the tax rate structures of individuals versus corporations.

entity

The federal income tax system ______. (Select all that apply.)

is relevant in developing business strategy applies to every entity conducting business in the U.S.

The variable is illustrated by companies strategically structuring transactions to generate income in subsidiaries located in lower tax rate states, relative to subsidiaries in higher tax rate states.

jurisdiction

Which of the following statements accurately describe taxable entities for U.S. federal income tax purposes? (Select all that apply.)

-A corporation is a tax paying entity. Thus, it computes and pays its own income taxes. -Individuals conducting business as sole proprietors include the income generated by their business on their personal income tax return.

The U.S. income tax structure ______. (Select all that apply.)

-provides for opportunities to tax plan using differences in tax rates and provisions across entities -includes similar provisions for the computation of taxable business income across all taxable entities

Company A and B are members of the same controlled group. Company A is located in Jurisdiction A which levies a 20% tax on income. Company B is located in Jurisdiction B which levies a 30% tax on income. If a transaction is structured such that $100,000 of income is shifted from Company B to Company A, the resulting tax savings is $.

10,000 or 10000

Little Company is a subsidiary of Big Company. Big is located in Jurisdiction A which levies a 20% income tax. Little is located in a Jurisdiction B which levies a 30% income tax. Both companies are considering a $20,000 expenditure. The after-tax cost of the expenditure is $for Big Company and $ for Little Company.

Blank 1: 16,000 or 16000 Blank 2: 14,000 or 14000

Which of the following statements about jurisdictions and the jurisdiction variable are true? (Select all that apply.)

-For federal purposes, state income taxes are deductible in the computation of taxable income. -Businesses can often minimize total tax burden by conducting business in jurisdictions with favorable tax climates. -Most businesses are subject to taxation in more than one jurisdiction.

Ms. Bird has $10,000 to invest. She could buy corporate bonds with an 10% rate of return or municipal bonds with a 8% rate of return. Which of the following statements are true? (Select all that apply.)

-If Ms. Bird has a 24% marginal tax rate, she should invest in the tax-favored municipal bonds. Reason: After-tax return on municipal bonds is $800 (10,000 × 8%). After-tax return on corporate bonds is $760 calculated as $1000 annual return (10% × 10,000) subject to 24% (or $240) tax. After-tax return is $1000 - 240 = $760. -If Ms. Bird invests in the municipal bonds, her implicit tax is $200. Reason: 10,000 × (10% - 8%) = $200.

Which of the following statements about tax deferral is false? (Select all that apply.)

-Tax deferral is never an effective planning strategy if the taxpayer's marginal tax rate does not change over time. -The greater the length of time that the payment of a tax is deferred, the greater the tax cost in NPV terms.

Which of the following statements is not accurate with respect to effective planning?

Flexible tax planning strategies should not be implemented because they cannot be relied on. Reason: Flexible tax strategies are desirable because they can be adapted to unforeseen circumstances.

Farm Depot has the opportunity to engage in a transaction that will generate $100,000 cash in the current year. The transaction will be structured such that provisions of the tax law allow them to defer tax on the income by recognizing $25,000 taxable income each year for the next four years. Based on NPV projections, Farm Depot decides to pursue the opportunity. Which of the following statements are true? (Select all that apply.)

All else equal, the proposed structure will result in a lower NPV than projected if tax rates increase over the next four years. The proposed structure reflects the time period variable. The IRS may challenge the tax deferral if the proposed structure does not have a genuine business purpose.

Which of the following statements is true regarding income and deduction shifting?

Deductions are most valuable when shifted to a higher taxed entity.

Match the following type of tax with the correct definition.

Implicit tax- The reduction in the before-tax rate of return on a tax-favored asset Explicit tax-The direct tax paid to the taxing authority

The Clarks own a house that they rent for $1200 per month. They have instructed their tenant to write the monthly rental check to their daughter, Missy, who is a college student. She will use the money to pay her rent and monthly expenses. Which of the following statements is a correct application of the assignment of income doctrine?

It is not illegal for the tenants to write the check to Missy, but the income remains taxable to the Clarks.

Indicate which tax treatment is associated with each type of income.

Municipal bond interest- Tax exempt Interest income other than municipal bond interest- Taxed at ordinary rates Capital gains-Taxed at a preferential rate

Select the statement that best describes tax planning using the character variable?

Provisions in the Internal Revenue Code are designed to limit the "artificial" conversion of ordinary income to capital gains.

Which of the following statements about tax evasion are false? (Select all that apply.)

Tax evasion is a politically correct term for tax avoidance. Tax planning always results in tax evasion.

Which of the following statements about tax strategies is false?

Tax planners should consider both the tax and the non-tax costs.

Which of the following best describes tax planning opportunities?

Tax planning opportunities arise when the tax law applies differentially to business transactions.

Which of the following statements about tax legal doctrines is false?

Taxpayers can invoke the substance over form doctrine to undo the tax consequence of a failed planning strategy. Reason: Taxpayers may not invoke any of the doctrines to undo a failed tax strategy.

Assume that Congress is considering several new tax provisions to encourage savings. Each of the proposed structures allows an individual to invest up to $18,000 of annual earnings in a savings plan which allows no current deduction. Which structure employs the time period variable to provide a tax incentive to save?

The annual earnings invested and income generated from that investment will not be taxed until the funds are withdrawn upon retirement.