tax chapter 3

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Future value can be computed as Future Value = Present Value/(1 + r)n.

FALSE

If tax rates will be higher next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.

FALSE

If tax rates will be higher next year, taxpayers should defer their income to next year regardless of their after-tax rate of return.

FALSE

In general, tax planners prefer to defer income. This is an example of the conversion strategy.

FALSE

Investors must consider complicit taxes as well as explicit taxes in order to make correct investment choices.

FALSE

Nontax factors do not play an important role in tax planning.

FALSE

Paying dividends to shareholders is one effective way of shifting income from a corporation to its shareholders.

FALSE

Tax evasion is a legal activity that forms the basis of the basic tax planning strategies.

FALSE

The assignment of income doctrine is a natural limitation to the timing strategy.

FALSE

The constructive receipt doctrine is a natural limitation for the conversion strategy.

FALSE

The downside of tax avoidance includes the potential of stiff monetary penalties and imprisonment.

FALSE

The goal of tax planning is tax minimization.

FALSE

The timing strategy becomes more attractive as tax rates decrease.

FALSE

The timing strategy is based on the idea that the location of where the income is taxed affects the tax costs of the income.

FALSE

The value of a tax deduction is higher for a taxpayer with a lower tax rate.

FALSE

When considering cash outflows, higher present values are preferred.

FALSE

An investment's time horizon does not affect after-tax rates of return on investments taxed annually.

TRUE

Assuming an after-tax rate of return of 10 percent, John should prefer to pay an expense of $85 today instead of an expense of $100 in one year. Use Exhibit 3.1.

TRUE

If tax rates will be lower next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.

TRUE

Implicit taxes may reduce the benefits of the conversion strategy.

TRUE

In general, tax planners prefer to accelerate deductions.

TRUE

One limitation of the timing strategy is the difficulties in accelerating a tax deduction without accelerating the actual cash outflow that generates the tax deduction.

TRUE

Tax avoidance is a legal activity that forms the basis of the basic tax planning strategies.

TRUE

Tax savings generated from deductions are considered cash inflows.

TRUE

The business purpose, step-transaction, and substance-over-form doctrines may limit the conversion strategy.

TRUE

The business purpose, step-transaction, and substance-over-form doctrines may limit the income-shifting strategy.

TRUE

The concept of present value is an important part of the timing strategy.

TRUE

The constructive receipt doctrine is more of an issue for cash-basis taxpayers.

TRUE

The conversion strategy capitalizes on the fact that tax rates vary across different activities.

TRUE

The income-shifting strategy requires taxpayers with varying tax rates.

TRUE

The present value concept becomes more important as interest rates increase.

TRUE

The time value of money suggests that $1 one year from now is worth less than $1 today.

TRUE

The timing strategy becomes more attractive as interest rates (i.e., rates of return) increase.

TRUE

The timing strategy becomes more attractive if a taxpayer is able to accelerate deductions by two or more years (versus one year).

TRUE

The timing strategy is particularly effective for cash-basis taxpayers.

TRUE

Virtually every transaction involves the taxpayer and two other parties that have an interest in the tax ramifications of the transaction.

TRUE

When considering cash inflows, higher present values are preferred.

TRUE


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