Question 1

Which of the following is more likely to receive IRS scrutiny under the assignment of income doctrine?

Accepted Answer

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 the choices are correct. 
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 the choices are correct. B

Question 2

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

Accepted Answer

A) True 
 B)False  True

Question 3

Richard recently received $10,000 of compensation for some consulting work (paid in cash). Jeffrey recently received $10,000 of interest income from city of Dallas bonds. Both taxpayers report no taxable income from these transactions. Is this considered tax avoidance or tax evasion? What is the difference, if any, between the two?

Accepted Answer

Richard is engaged in tax evasion. Jeffrey is engaged in tax avoidance. Tax avoidance is the legal act of arranging one's affairs to minimize taxation. The rewards of tax avoidance include maximizing the taxpayer's wealth. It has long been endorsed by the courts and Congress. In contrast to tax avoidance, tax evasion (willful intent to defraud the government)falls outside the confines of legal tax avoidance. The "rewards" of tax evasion include civil and criminal penalties, including large monetary fines and sentencing to federal prison. In many cases there is a clear distinction between avoidance (e.g., not paying tax on municipal bond interest)and evasion (e.g., not paying tax on $10,000 of compensation). In other cases, the line between tax avoidance and evasion is less clear. In these situations, professional judgment, the use of a "smell test," and consideration of the business purpose, step-transaction, and substance-over-form doctrines may prove useful.

Question 4

Implicit taxes may reduce the benefits of the conversion strategy.

Accepted Answer

A) True 
 B)False

Question 5

Based only on the information provided for each scenario, determine whether Eddy or Scott will benefit more from using the timing strategy and why there will be a benefit to that person. Use Exhibit3.1.
a. Eddy has a 40 percent tax rate. Scott has a 30 percent tax rate. b. Eddy and Scott each have a 40 percent tax rate. Eddy has $10,000 of income that could be deferred; Scott has $20,000 of income that could be shifted. c. Eddy and Scott each have a 40 percent tax rate and $20,000 of income that could be deferred. Eddy's after-tax rate of return is 8 percent. Scott's after-tax rate of return is 10 percent. d. Eddy and Scott each have a 40 percent tax rate, $20,000 of income that could be deferred, and an after-tax rate of return of 10 percent. Eddy can defer income up to three years. Scott can defer income up to two years.

Accepted Answer

a. Eddy, because the benefits of the tim

Question 6

If Julius has a 22 percent tax rate and a 10 percent after-tax rate of return, $25,000 of income in three years will cost him how much tax in today's dollars? Use Exhibit 3.1. (Rounddiscount factor(s)to three decimal places.)

Accepted Answer

A) $4,131 
B) $18,775 
C) $5,500 
D) $25,000 
E) None of the choices are correct. 
A) $4,131 
B) $18,775 
C) $5,500 
D) $25,000 
E) None of the choices are correct.

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

Assuming a positive interest rate, the present value of money suggests:

Accepted Answer

A) $1 today = $1 in one year. B) $1 today > $1 in one year. C) $1 today < $1 in one year. D) $1 today ≤ $1 in one year. E) None of the choices are correct. A) $1 today = $1 in one year. B) $1 today > $1 in one year. C) $1 today < $1 in one year. D) $1 today ≤ $1 in one year. E) None of the choices are correct.

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Explain why $1 today is not equal to $1 in the future. Why is understanding this concept particularly important for tax planning? What tax strategy exploits this concept?

Accepted Answer

Assuming an investor can earn a positive

Question 11

If Tom invests $70,000 in a taxable corporate bond that provides a 5 percent before-tax return, how much will Tom's investment be worth in either 8 or 20 years from now when the bond matures? Assume Tom's marginal tax rate is 35 percent.

Accepted Answer

A) $103,422; $185,731 
B) $105,697; $197,373 
C) $92,536; $140,675 
D) $90,410; $132,709 
E) None of the choices are correct. 
A) $103,422; $185,731 
B) $105,697; $197,373 
C) $92,536; $140,675 
D) $90,410; $132,709 
E) None of the choices are correct.

Question 12

Assume that John's marginal tax rate is 37 percent. If a city of Austin bond pays 6 percent interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds?

Accepted Answer

A) 37.00 percent 
B) 9)52 percent 
C) 6)00 percent 
D) 3)78 percent 
E) None of the choices are correct. 
A) 37.00 percent 
B) 9)52 percent 
C) 6)00 percent 
D) 3)78 percent 
E) None of the choices are correct.

Question 13

Assume that Keisha's marginal tax rate is 37 percent and her tax rate on dividends is 20 percent. If a city of Atlanta bond pays 6.56 percent 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 from a cash-flow perspective?

Accepted Answer

A) 20.00 percent 
B) 9)20 percent 
C) 8)20 percent 
D) 6)56 percent 
E) None of the choices are correct. 
A) 20.00 percent 
B) 9)20 percent 
C) 8)20 percent 
D) 6)56 percent 
E) None of the choices are correct.

Question 14

Based only on the information provided for each scenario, determine whether Kristi or Cindy will benefit more from using the timing strategy and why there will be a benefit to that person. Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)a. Kristi has a 40 percent tax rate and can defer $32,000 of income. Cindy has a 30 percent tax rate and can defer $42,000 of income. b. Kristy has a 30 percent tax rate and a 9 percent after-tax rate of return and can defer $37,000 of income for three years. Cindy has a 40 percent tax rate and an 7 percent after-tax rate of return and can defer $32,000 of income for four years.

Accepted Answer

a. [a(13)], because she can defer ${{[a(

Question 15

If Thomas has a 37 percent tax rate and a 12 percent after-tax rate of return, $74,000 of income in five years will cost him how much tax in today's dollars? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)

Accepted Answer

A) $74,000 
B) $27,380 
C) $44,814 
D) $15,524 
E) None of the choices are correct. 
A) $74,000 
B) $27,380 
C) $44,814 
D) $15,524 
E) None of the choices are correct.

Question 16

A taxpayer earning income in "cash" and not reporting it as taxable income is an example of:

Accepted Answer

A) tax avoidance. 
B) tax evasion. 
C) conversion. 
D) income shifting. 
E) None of the choices are correct. 
A) tax avoidance. 
B) tax evasion. 
C) conversion. 
D) income shifting. 
E) None of the choices are correct.

Question 17

Assume that Lucas's marginal tax rate is 32 percent and his tax rate on dividends is 15 percent. If a dividend-paying stock (with no growth potential)pays an 8 percent dividend yield, what interest rate would a municipal bond have to offer for Lucas to be indifferent between the two investments from a cash-flow perspective?

Accepted Answer

A) 32.00 percent 
B) 15.00 percent 
C) 8)00 percent 
D) 6)80 percent 
E) None of the choices are correct. 
A) 32.00 percent 
B) 15.00 percent 
C) 8)00 percent 
D) 6)80 percent 
E) None of the choices are correct.

Question 18

Lucky owns a maid service that cleans several local businesses nightly. Lucky, a high tax rate taxpayer, would like to shift some income to his son Rocco. Lucky tells all of his customers (who are always timely in their payments)to pay Rocco, and then Rocco will report 50 percent of the income as a collection fee. Lucky will report the remaining 50 percent. Will this shift the income from Lucky to Rocco? Why or why not? What doctrines influence your answer? Any suggestions for Lucky?

Accepted Answer

While Rocco's collection efforts are lik

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Tax savings generated from deductions are considered cash inflows.

Accepted Answer

A) True 
 B)False

Which of the following is more likely to receive IRS scrutiny under the assignment of income doctrine?

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

Implicit taxes may reduce the benefits of the conversion strategy.

If Julius has a 22 percent tax rate and a 10 percent after-tax rate of return, $25,000 of income in three years will cost him how much tax in today's dollars? Use Exhibit 3.1. (Rounddiscount factor(s)to three decimal places.)

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

Assuming a positive interest rate, the present value of money suggests:

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

Explain why $1 today is not equal to $1 in the future. Why is understanding this concept particularly important for tax planning? What tax strategy exploits this concept?

If Tom invests $70,000 in a taxable corporate bond that provides a 5 percent before-tax return, how much will Tom's investment be worth in either 8 or 20 years from now when the bond matures? Assume Tom's marginal tax rate is 35 percent.

Assume that John's marginal tax rate is 37 percent. If a city of Austin bond pays 6 percent interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds?

If Thomas has a 37 percent tax rate and a 12 percent after-tax rate of return, $74,000 of income in five years will cost him how much tax in today's dollars? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)

A taxpayer earning income in "cash" and not reporting it as taxable income is an example of:

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

Tax savings generated from deductions are considered cash inflows.

An Introduction to Tax

Tax Compliance, the Irs, and Tax Authorities

Individual Income Tax Overview, Dependents, and Filing Status

Gross Income and Exclusions

Individual Deductions

Investments

Individual Income Tax Computation and Tax Credits

Business Income, Deductions, and Accounting Methods

Property Acquisition and Cost Recovery

Property Dispositions

Compensation

Retirement Savings and Deferred Compensation

Tax Consequences of Home Ownership

Filters

Exam 3: Tax Planning Strategies and Related Limitations

Which of the following is more likely to receive IRS scrutiny under the assignment of income doctrine?

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

Implicit taxes may reduce the benefits of the conversion strategy.

If Julius has a 22 percent tax rate and a 10 percent after-tax rate of return, $25,000 of income in three years will cost him how much tax in today's dollars? Use Exhibit 3.1. (Rounddiscount factor(s)to three decimal places.)

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

Assuming a positive interest rate, the present value of money suggests:

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

Explain why $1 today is not equal to $1 in the future. Why is understanding this concept particularly important for tax planning? What tax strategy exploits this concept?

If Tom invests $70,000 in a taxable corporate bond that provides a 5 percent before-tax return, how much will Tom's investment be worth in either 8 or 20 years from now when the bond matures? Assume Tom's marginal tax rate is 35 percent.

Assume that John's marginal tax rate is 37 percent. If a city of Austin bond pays 6 percent interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds?

If Thomas has a 37 percent tax rate and a 12 percent after-tax rate of return, $74,000 of income in five years will cost him how much tax in today's dollars? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)

A taxpayer earning income in "cash" and not reporting it as taxable income is an example of:

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

Tax savings generated from deductions are considered cash inflows.

An Introduction to Tax

Tax Compliance, the Irs, and Tax Authorities

Individual Income Tax Overview, Dependents, and Filing Status

Gross Income and Exclusions

Individual Deductions

Investments

Individual Income Tax Computation and Tax Credits

Business Income, Deductions, and Accounting Methods

Property Acquisition and Cost Recovery

Property Dispositions

Compensation

Retirement Savings and Deferred Compensation

Tax Consequences of Home Ownership

Filters