Tax Quizzes

Which of the following statements about a regressive tax rate structure is false? a. A regressive rate structure cannot result in vertical equity b. Regressive rates decrease as the tax base increases c. A regressive rate structure places a proportionally heavier tax burden on taxpayers with smaller tax bases than persons with greater tax bases d. None of these choices are false

a. A regressive rate structure cannot result in vertical equity even with a regressive rate structure, persons with a smaller tax base may pay less tax than persons with a greater tax base

Hower Incorporated's tax advisor recommends that the corporation take a deduction that the IRS has disallowed for other corporations in similar circumstances. If Hower decides not to take the deduction, it is reducing: a. Audit risk b. Tax law uncertainty c. Business risk d. None of these choices are correct

a. Audit risk

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 would 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? a. CCC should engage in the transaction to generate $16,750 more after-tax cash flow b. Carter should engage in the transaction to avoid the extra expense c. CCC should engage in the transaction because it has the lower marginal tax rate d. Because Carter and CCC are owned by the same family, the family is indifferent as to which corporation engages in the transaction

a. CCC should engage in the transaction to generate $16,750 more after-tax cash flow 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) CCC's before-tax cash flow $457,500 ($500,000 - $42,500)

Government officials of Country Z estimate that next year's public programs will cost $19 million but that tax revenues will be only $15 million. Which of the following statements is false? a. Country Z's tax system is sufficient b. Country Z/s government is engaging in deficit spending c. If Country Z must borrow $4 million to pay for its public programs, its national debt will increase by $4 million d. Country Z's government could balance its budget by eliminating a program that costs $4 million

a. Country Z's tax system is sufficient

Which of the following statements about the time period variable is false? a. If Congress replaced the current progressive income tax rates with a proportionate rate applying to all taxpayers, the time period variable would no longer be a factor in tax planning b. The time period variable becomes more important as the taxpayer's discount rate for computing NPV increases c. Tax planning strategies based on the time period variable must involve at least two different taxable years d. Tax planning strategies based on the time period variable reflect the time value of money

a. If Congress replaced the current progressive income tax rates with a proportionate rate applying to all taxpayers, the time period variable would no longer be a factor in tax planning

Mrs. King is a US citizen who permanently resides in South Africa. Which of the following is true? a. The US government has jurisdiction to tax Mrs. King b. The US government has no jurisdiction to tax Mrs. King because she does not live in the US c. The US government has no jurisdiction to tax Mrs. King because she does not earn any income from a source within the US d. Mrs. King can elect whether to pay tax to the US or to South Africa

a. The US government has jurisdiction to tax Mrs. King

A convenient tax has low compliance costs for taxpayers and low collection and enforcement costs for the government a. True b. False

a. True

A deduction is worth twice as much to a taxpayer with a 30% marginal rate than a taxpayer with a 15% rate a. True b. False

a. True

A dollar available today is always worth more than a dollar not available until a future period a. True b. False

a. True

If a tax has a proportionate rate structure, a taxpayer's marginal rate and average rate are equal a. True b. False

a. True

Tax systems with regressive rate structures result in a proportionally heavier tax burden on persons with smaller tax bases a. True b. False

a. True

The US government has jurisdiction to tax individuals who are not US citizens or permanent US residents but who earn income from a source within the US a. True b. False

a. True

The rate at which an item of income is taxed depends on the tax character of the income a. True b. False

a. True

The time period variable is based on the time value of money a. True b. False

a. True

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

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

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

b. Acme's customers

Corporations, LLCs, and partnerships are all taxable entities a. True b. False

b. False

Payment of a tax entitles the payer to a specific good or service from the government? a. True b. False

b. False

The Internal Revenue Code is written by the Internal Revenue Service a. True b. False

b. False

The federal government collects more revenue from the corporate income tax than from the individual income tax a. True b. False

b. False

The present value of a dollar available in a future period increases as the discount rate increases a. True b. False

b. False present value decreases as the discount rate increases

The tax cost of a transaction depends on the taxpayer's average tax rate for the year a. True b. False

b. False tax cost depends on the taxpayer's marginal tax rate

Ms. Leik has $50,000 in an investment paying 10% annual interest. Each year, Ms. Leik incurs a $600 cash expense relating to the investment. If Ms. Leik's marginal tax rate is 20%, which of the following statements is true? a. Ms. Leik's annual after-tax cash flow from this investment is $3,520 b. If the interest is taxable but the expense is not deductible, Ms. Leik's annual after-tax cash flow from the investment is $3,400 c. If the interest is tax-exempt and the expense is not deductible, Ms. Leik's annual after-tax cash flow is $5,000 d. None of these choices are true

b. If the interest is taxable but the expense is not deductible, Ms. Leik's annual after-tax cash flow from the investment is $3,400 annual tax cost is $1,000 ($5,000 * 20%), and the after-tax cash flow is $3,400 ($5,000 interest - $600 expense - $1,000 tax cost)

Mrs. Sanchez received a $12,000 cash payment. If Mrs. Sanchez's marginal tax rate is 40%, which of the following statements is true? a. If only $9,200 of the payment is taxable income, and after-tax cash flow is $9,200 b. If the payment is not taxable income, and after-tax cash flow is $12,000 c. If the payment is taxable income, and after-tax cash flow is $4,800 d. None of these choices are true

b. If the payment is not taxable income, and after-tax cash flow is $12,000

The government of Nation C operated at a $32 billion deficit this year. The deficit suggests that Nation C's tax system is: a. Inefficient b. Insufficient c. Unfair d. Incovenient

b. Insufficient

Mr. Erske plans to pay $100,000 for one of three investment alternatives that have the same risk. The income from investment 1 would be taxed at Mr. Erske's 32% regular tax rate, and the income from investment 3 is tax-exempt. The investments offer the following before-tax yields Investment 1: 8.5% Investment 2: 7.5% Investment 3: 6.0% Which investment should Mr. Erske select? a. Investment 1 b. Investment 2 c. Investment 3 d. Mr. Erske is neutral between investment 2 and investment 3

b. Investment 2 Investment 1 after-tax yield 5.78% (8.5% * (1 - 0.32 tax rate)) Investment 2 after-tax yield 6.375% (7.5% * (1 - 0.15 tax rate)) Investment 3 after-tax yield 6.0%

Which of the following statements about discount rates is true? a. The higher the marginal tax rate, the higher the discount rate for future cash flows should be b. The higher the degree of risk involved in a transaction, the higher the discount rate for future cash flows should be c. The longer the time period over which a transaction will generate cash flows, the higher the discount rate should be d. The greater the amount of cash generated by a transaction, the higher the discount rate should be

b. The higher the degree of risk involved in a transaction, the higher the discount rate for future cash flows should be discount rate is independent of marginal tax rate, length of time period, or amount of cash

Which of the following statements about Treasury regulations is false? a. Treasury regulations are written to interpret and explain the Internal Revenue Code b. Treasury regulations are part of the statutory law c. A federal court can invalidate a Treasury regulation if the court concludes that the regulation incorrectly interprets the Internal Revenue Code d. None of these choices are false

b. Treasury regulations are part of the statutory law

Pratt Company structured an income-generating transaction so that the $750,000 income and cash flow shifted to Pratt's wholly owned subsidiary, PTB Company. If Pratt's marginal tax rate is 21%, and PTB's tax rate is 10%, compute the tax savings from the income shift a. $157,500 b. $75,000 c. $82,500 d. $78,750

c. $82,500 $750,000 * 11% tax difference

Bailey Incorporated is planning a transaction that requires a $60,000 deductible cash expenditure. The transaction is structured so that Bailey will pay the cash and report the deduction this year (year 0). Use Appendix A of your textbook provided to compute the increase in the NPV of the transaction if it can be restructured so that Bailey will report the deduction this year, but pay the cash two years later (year 2). Bailey's marginal tax rate is 25%, and it uses a 9% discount rate to compute NPV a. $8,677 b. $9,014 c. $9,480 d. None of these choices are correct

c. $9,480 NPV under the current structure is $45,000 ($60,000 before-tax cash flow + $15,000 tax savings) NPV deferred two years is $35,520 (($60,000 before-tax cash flow * 0.842) + $15,000 tax savings) $15,000 tax savings ($60,000 before-tax cash flow * 25% marginal tax rate) 0.842 (PV 2 years, 9% discount rate)

What gives the federal government the right to impose a tax on individual and corporate income? a. Internal Revenue Code of 1986 b. Revenue Act of 1913 c. 16th Amendment to the US Constitution d. Bill of Rights

c. 16th Amendment to the US

Which of the following statements about different tax rates over time is false? a. A 5% increase in the tax rate for year 10 has less effect on NPV than a 5% increase in the tax rate for year 4 b. Future tax rates used in NPV calculations are estimates because Congress can change the statutory rates every year c. A NPV calculation must assume a constant tax rate for all future periods d. A firm's future tax rate may change because of increases or decreases in future taxable income

c. A NPV calculation must assume a constant tax rate for all future periods

Which of the following statements regarding a convenient tax is false? a. From the government's viewpoint, a good tax should be convenient to administer b. From the taxpayer's viewpoint, a good tax should be convenient to pay c. A convenient tax should have a method of collection that offers maximum opportunity for noncompliance d. A convenient tax should permit taxpayers to compute their tax with reasonable certainty without incurring undue costs

c. A convenient tax should have a method of collection that offers maximum opportunity for noncompliance

TallBoy Incorporated is a local furniture manufacturer and Leley Company is a retail furniture store. The two companies have no owners in common. Leley recently negotiated to purchase $845,000 of furniture from TallBoy. This purchase is an example of a/an: a. Related party transaction b. Public market transaction c. Arm's length transaction d. None of these choices are correct

c. Arm's length transaction

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? a. The rate increase will increase revenue by $160,000 b. Bases on dynamic forecast, the rate increase will increase revenue by $160,000 c. Based on static forecast, the rate increase will increase revenue by $160,000 d. None of these choices are true

c. Based on a static forecast, the rate increase will increase revenue by $160,000 dynamic forecast would be based on a projected decrease in the average annual golf cart purchases because of the tax increase

The federal income tax law allows individuals whose property is destroyed by a natural disaster such as a fire or hurricane to reduce their taxable income by the amount of their financial loss. This rule is intended to improve the: a. Convenience of the tax b. Efficiency of the tax c. Horizontal equity of the tax d. Vertical equity of the tax

c. Horizontal equity of the tax individuals who must replace property destroyed by a disaster arguably have less ability to pay income tax

Which of the following sources of tax law carries the most authority? a. Revenue procedure b. Treasury regulation c. Supreme Court decision d. The three sources of tax law have equal authority

c. Supreme Court decision

Mrs. Jax plans to pay $100,000 for one of the three investment alternatives that have the same risk. The income from investment 1 would be taxed at Mrs. Jax's 37% regular tax rate, the income from investment 2 would be taxed at a 20% preferential rate, and the income from investment 3 is tax-exempt. The investments offer the following before-tax yields Investment 1: 8.25% Investment 2: 7.5% Investment 3: 6.0% Which investment should Mrs. Jax select? a. Investment 1 b. Investment 2 c. Investment 3 d. Mrs. Jax is neutral between investment 2 and investment 3

d. Mrs. Jax is neutral between investment 2 and investment 3 Investment 1 after-tax yield 5.198% (8.25% * (1 - 0.37 tax rate)) Investment 2 after-tax yield 6.0% (7.5% * (1 - 0.20)) Investment 3 after-tax yield 6.0%

Which of the following statements concerning property taxes is false? a. Property taxes are ad valorem taxes b. Property taxes are the primary source of revenue for local governments c. Property taxes can be levied on realty or personalty d. None of these choices are false

d. None of these choices are false

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 If 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