Deck 3: Tax Planning Strategies and Related Limitations

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Question
Future value can be computed as Future Value = Present Value/(1 + r)n.
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Question
The timing strategy becomes more attractive if a taxpayer is able to accelerate deductions by two or more years (versus one year).
Question
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.
Question
The timing strategy is particularly effective for cash-basis taxpayers.
Question
When considering cash outflows, higher present values are preferred.
Question
The constructive receipt doctrine is a natural limitation for the conversion strategy.
Question
Nontax factors do not play an important role in tax planning.
Question
When considering cash inflows, higher present values are preferred.
Question
The present value concept becomes more important as interest rates increase.
Question
The timing strategy becomes more attractive as interest rates (i.e., rates of return)increase.
Question
The concept of present value is an important part of the timing strategy.
Question
Tax savings generated from deductions are considered cash inflows.
Question
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.
Question
Virtually every transaction involves the taxpayer and two other parties that have an interest in the tax ramifications of the transaction.
Question
The time value of money suggests that $1 one year from now is worth less than $1 today.
Question
The timing strategy becomes more attractive as tax rates decrease.
Question
In general, tax planners prefer to defer income.This is an example of the conversion strategy.
Question
In general, tax planners prefer to accelerate deductions.
Question
The timing strategy is based on the idea that the location of where the income is taxed affects the tax costs of the income.
Question
The goal of tax planning is tax minimization.
Question
If tax rates will be higher next year, taxpayers should defer their income to next year regardless of their after-tax rate of return.
Question
The constructive receipt doctrine is more of an issue for cash-basis taxpayers.
Question
The goal of tax planning generally is to:

A)minimize taxes.
B)minimize IRS scrutiny.
C)maximize after-tax wealth.
D)support the federal government.
E)None of the choices are correct.
Question
The assignment of income doctrine is a natural limitation to the timing strategy.
Question
Paying dividends to shareholders is one effective way of shifting income from a corporation to its shareholders.
Question
If tax rates will be higher next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.
Question
If tax rates will be lower next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.
Question
The downside of tax avoidance includes the potential of stiff monetary penalties and imprisonment.
Question
An investment's time horizon does not affect after-tax rates of return on investments taxed annually.
Question
The value of a tax deduction is higher for a taxpayer with a lower tax rate.
Question
Investors must consider complicit taxes as well as explicit taxes in order to make correct investment choices.
Question
The business purpose, step-transaction, and substance-over-form doctrines may limit the income-shifting strategy.
Question
The income-shifting strategy requires taxpayers with varying tax rates.
Question
The business purpose, step-transaction, and substance-over-form doctrines may limit the conversion strategy.
Question
Effective tax planning requires all of these considerations except:

A)nontax factors.
B)the taxpayer's tax costs of alternative transactions.
C)the other party's tax costs of alternative transactions.
D)the other party's nontax costs of alternative transactions.
E)all of the choices are required considerations.
Question
Tax evasion is a legal activity that forms the basis of the basic tax planning strategies.
Question
The conversion strategy capitalizes on the fact that tax rates vary across different activities.
Question
Implicit taxes may reduce the benefits of the conversion strategy.
Question
Which is not a basic tax planning strategy?

A)Income shifting.
B)Timing.
C)Conversion.
D)Arm's length transaction.
E)None of the choices are correct.
Question
Tax avoidance is a legal activity that forms the basis of the basic tax planning strategies.
Question
Which of the following does not limit the benefits of deferring income?

A)Increasing tax rates.
B)A taxpayer with severe cash flow needs.
C)If continuing an investment would generate a low rate of return.
D)If continuing an investment would subject the taxpayer to unnecessary risk.
E)None of the choices are correct.
Question
Rolando's employer pays year-end bonuses each year on December 31.Rolando, a cash-basis taxpayer, would prefer not to pay tax on his bonus this year.So, he leaves town on December 31, 2018, and doesn't pick up his check until January 2, 2019.When should Rolando report his bonus?

A)2019.
B)2018.
C)Rolando can choose the year to report the income.
D)it does not matter.
E)None of the choices are correct.
Question
If Thomas has a 37 percent tax rate and a 6 percent after-tax rate of return, $50,000 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)$50,000.
B)$18,500.
C)$37,350.
D)$13,820
E)None of the choices are correct.
Question
If tax rates are increasing:

A)taxpayers should accelerate income.
B)taxpayers should defer deductions.
C)taxpayers should defer income.
D)you need more information to make a recommendation.
E)None of the choices are correct.
Question
Which of the following increases the benefits of income deferral?

A)Increasing tax rates.
B)Smaller after-tax rate of return.
C)Larger after-tax rate of return.
D)Smaller magnitude of transactions.
E)None of the choices are correct.
Question
If tax rates are decreasing:

A)taxpayers should accelerate income.
B)taxpayers should defer deductions.
C)taxpayers should accelerate deductions.
D)taxpayers should defer deductions and accelerate income.
E)None of the choices are correct.
Question
If Julius has a 32 percent tax rate and a 10 percent after-tax rate of return, a $40,000 tax deduction in two years will save how much tax in today's dollars? Use Exhibit 3.1.(Round discount factor(s)to three decimal places.)

A)$40,000.
B)$10,573.
C)$33,040.
D)$12,800.
E)None of the choices are correct.
Question
If Lucy earns a 6 percent after-tax rate of return, $8,000 received in four years is worth how much today? Use Exhibit 3.1.(Round discount factor(s)to three decimal places.)

A)$8,000.
B)$7,544.
C)$8,989.
D)$6,336.
E)None of the choices are correct.
Question
Which of the following is not required to determine the best timing strategy?

A)The taxpayer's after-tax rate of return.
B)The taxpayer's tax rate this year.
C)The taxpayer's tax rate in future years.
D)The taxpayer's tax rate last year.
E)None of the choices are correct.
Question
If Jim invested $100,000 in an annual dividend-paying stock today with a 7 percent return, what investment time period will give Jim the greatest after-tax return?

A)1 year.
B)5 years.
C)10 years.
D)20 years.
E)All yield the same after-tax return.
Question
Which of the following decreases the benefits of accelerating deductions?

A)Decreasing tax rates.
B)Smaller after-tax rate of return.
C)Larger after-tax rate of return.
D)Larger magnitude of transactions.
E)None of the choices are correct.
Question
Which of the following tax planning strategies is based on the present value of money?

A)timing.
B)tax avoidance.
C)income shifting.
D)conversion.
E)None of the choices are correct.
Question
If Rudy has a 25 percent tax rate and a 6 percent after-tax rate of return, a $30,000 tax deduction in four years will save how much tax in today's dollars? Use Exhibit 3.1.(Round discount factor(s)to three decimal places.)

A)$30,000.
B)$7,500.
C)$23,760.
D)$5,940.
E)None of the choices are correct.
Question
Assuming a positive interest rate, the present value of money suggests:

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
If Nicolai earns an 8 percent after-tax rate of return, $20,000 today would be worth how much to Nicolai in five years? Use future value of $1.(Round discount factor(s)to four decimal places.)

A)$20,000.
B)$13,620.
C)$18,520.
D)$21,600.
E)None of the choices are correct.
Question
The constructive receipt doctrine:

A)is particularly restrictive for accrual-basis taxpayers.
B)causes income to be recognized before it is actually received.
C)causes income to be recognized after it is actually received.
D)applies equally to income and expenses.
E)None of the choices are correct.
Question
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.(Round discount factor(s)to three decimal places.)

A)$4,131.
B)$18,775.
C)$5,500.
D)$25,000.
E)None of the choices are correct.
Question
If tax rates are decreasing:

A)taxpayers should accelerate income.
B)taxpayers should defer deductions.
C)taxpayers should defer income.
D)taxpayers should defer deductions and accelerate income.
E)None of the choices are correct.
Question
If Scott earns a 12 percent after-tax rate of return, $15,000 today would be worth how much to Scott in two years? Use future value of $1.(Round discount factor(s)to five decimal places.)

A)$15,000.
B)$11,955.
C)$18,520.
D)$18,816.
E)None of the choices are correct.
Question
If Joel earns a 10 percent after-tax rate of return, $10,000 received in two years is worth how much today? Use Exhibit 3.1.(Round discount factor(s)to three decimal places.)

A)$10,000.
B)$9,090.
C)$8,260.
D)$11,000.
E)None of the choices are correct.
Question
Assume that Javier is indifferent between investing in a city of El Paso bond that pays 5 percent interest and a corporate bond that pays 6.25 percent interest.What is Javier's marginal tax rate?

A)50 percent.
B)40 percent.
C)30 percent.
D)20 percent.
E)None of the choices are correct.
Question
Which of the following is an example of the income-shifting strategy?

A)A corporation paying its shareholders a $20,000 dividend.
B)A corporation paying its owner a $20,000 salary.
C)A high tax rate taxpayer investing in tax-exempt municipal bonds.
D)A cash-basis business delaying billing its customers until after year-end.
E)None of the choices are correct.
Question
Assume that Lavonia's marginal tax rate is 22 percent.If a city of Tampa bond pays 5 percent interest, what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

A)22 percent.
B)5 percent.
C)7 percent.
D)3)9 percent.
E)None of the choices are correct.
Question
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?

A)32.00 percent
B)15.00 percent.
C)8)00 percent.
D)6)80 percent.
E)None of the choices are correct.
Question
Which of the following is needed to implement the income-shifting strategy?

A)Taxpayers with varying tax rates.
B)Decreasing tax rates.
C)Increasing tax rates.
D)Unrelated taxpayers.
E)None of the choices are correct.
Question
Assume that Keisha's marginal tax rate is 37 percent and her tax rate on dividends is 15 percent.If a city of Atlanta bond pays 7.65 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?

A)15.00 percent.
B)10.00 percent.
C)9)00 percent.
D)7)65 percent.
E)None of the choices are correct.
Question
Which of the following is an example of the timing strategy?

A)A cash-basis taxpayer paying all outstanding bills by year-end.
B)A parent employing her child in the family business.
C)A business paying its owner a $30,000 salary.
D)A taxpayer investing in a tax-preferred investment.
E)None of the choices are correct.
Question
Which of the following does not limit the income-shifting strategy?

A)Assignment of income doctrine.
B)Business purpose doctrine.
C)Substance-over-form doctrine.
D)Step-transaction doctrine.
E)None of the choices are correct.
Question
Which of the following is an example of the timing strategy?

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.
Question
Assume that Marsha is indifferent between investing in a city of Destin bond that pays 6 percent interest and a corporate bond that pays 8 percent interest.What is Marsha's marginal tax rate?

A)50 percent.
B)40 percent.
C)30 percent.
D)20 percent.
E)None of the choices are correct.
Question
Jason's employer pays year-end bonuses each year on December 31.Jason, a cash-basis taxpayer, would prefer not to pay tax on his bonus this year (and actually would prefer his daughter to pay tax on the bonus).So, he leaves town on December 31, 2018, and has his daughter, Julie, pick up his check on January 2, 2019.Who reports the income and when?

A)Julie in 2018.
B)Julie in 2019.
C)Jason in 2018.
D)Jason in 2019.
E)None of the choices are correct.
Question
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?

A)37.00 percent.
B)9)52 percent.
C)6)00 percent.
D)3)78 percent.
E)None of the choices are correct.
Question
Assume that Larry's marginal tax rate is 24 percent.If corporate bonds pay 10 percent interest, what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

A)24.00 percent.
B)12.00 percent.
C)10.00 percent.
D)7)60 percent.
E)None of the choices are correct.
Question
A common income-shifting strategy is to:

A)shift income from low tax rate taxpayers to high tax rate taxpayers.
B)shift deductions from low tax rate taxpayers to high tax rate taxpayers.
C)shift deductions from high tax rate taxpayers to low tax rate taxpayers.
D)accelerate tax deductions.
E)None of the choices are correct.
Question
Which of the following is more likely to receive IRS scrutiny under the assignment of income doctrine?

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.
Question
A taxpayer paying his 10-year-old daughter $50,000 a year for consulting likely violates which doctrine?

A)Constructive receipt doctrine.
B)Implicit tax doctrine.
C)Substance-over-form doctrine.
D)Step-transaction doctrine.
E)None of the choices are correct.
Question
Which of the following may limit the conversion strategy?

A)Implicit taxes.
B)Assignment of income doctrine.
C)Constructive receipt doctrine.
D)Activities with preferential tax rates.
E)None of the choices are correct.
Question
Which of the following is an example of the conversion strategy?

A)A corporation paying its shareholders a $20,000 dividend.
B)A corporation paying its owner a $20,000 salary.
C)A high tax rate taxpayer investing in tax exempt municipal bonds.
D)A cash-basis business delaying billing its customers until after year end.
E)None of the choices are correct.
Question
Assume that Bill's marginal tax rate is 32 percent.If corporate bonds pay 8 percent interest, what interest rate would a municipal bond have to offer for Bill to be indifferent between the two bonds?

A)32.00 percent.
B)10.40 percent.
C)8)00 percent.
D)7)00 percent.
E)None of the choices are correct.
Question
A taxpayer instructing her son to collect rent checks for the taxpayer's property and to report this as taxable income on the son's tax return violates which doctrine?

A)Constructive receipt doctrine.
B)Implicit tax doctrine.
C)Assignment of income doctrine.
D)Step-transaction doctrine.
E)None of the choices are correct.
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Deck 3: Tax Planning Strategies and Related Limitations
1
Future value can be computed as Future Value = Present Value/(1 + r)n.
False
2
The timing strategy becomes more attractive if a taxpayer is able to accelerate deductions by two or more years (versus one year).
True
3
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
4
The timing strategy is particularly effective for cash-basis taxpayers.
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5
When considering cash outflows, higher present values are preferred.
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6
The constructive receipt doctrine is a natural limitation for the conversion strategy.
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7
Nontax factors do not play an important role in tax planning.
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8
When considering cash inflows, higher present values are preferred.
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9
The present value concept becomes more important as interest rates increase.
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10
The timing strategy becomes more attractive as interest rates (i.e., rates of return)increase.
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11
The concept of present value is an important part of the timing strategy.
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12
Tax savings generated from deductions are considered cash inflows.
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13
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.
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14
Virtually every transaction involves the taxpayer and two other parties that have an interest in the tax ramifications of the transaction.
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15
The time value of money suggests that $1 one year from now is worth less than $1 today.
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16
The timing strategy becomes more attractive as tax rates decrease.
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17
In general, tax planners prefer to defer income.This is an example of the conversion strategy.
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18
In general, tax planners prefer to accelerate deductions.
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19
The timing strategy is based on the idea that the location of where the income is taxed affects the tax costs of the income.
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20
The goal of tax planning is tax minimization.
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21
If tax rates will be higher next year, taxpayers should defer their income to next year regardless of their after-tax rate of return.
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22
The constructive receipt doctrine is more of an issue for cash-basis taxpayers.
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23
The goal of tax planning generally is to:

A)minimize taxes.
B)minimize IRS scrutiny.
C)maximize after-tax wealth.
D)support the federal government.
E)None of the choices are correct.
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24
The assignment of income doctrine is a natural limitation to the timing strategy.
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25
Paying dividends to shareholders is one effective way of shifting income from a corporation to its shareholders.
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26
If tax rates will be higher next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.
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27
If tax rates will be lower next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.
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28
The downside of tax avoidance includes the potential of stiff monetary penalties and imprisonment.
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29
An investment's time horizon does not affect after-tax rates of return on investments taxed annually.
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30
The value of a tax deduction is higher for a taxpayer with a lower tax rate.
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31
Investors must consider complicit taxes as well as explicit taxes in order to make correct investment choices.
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32
The business purpose, step-transaction, and substance-over-form doctrines may limit the income-shifting strategy.
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33
The income-shifting strategy requires taxpayers with varying tax rates.
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34
The business purpose, step-transaction, and substance-over-form doctrines may limit the conversion strategy.
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35
Effective tax planning requires all of these considerations except:

A)nontax factors.
B)the taxpayer's tax costs of alternative transactions.
C)the other party's tax costs of alternative transactions.
D)the other party's nontax costs of alternative transactions.
E)all of the choices are required considerations.
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36
Tax evasion is a legal activity that forms the basis of the basic tax planning strategies.
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37
The conversion strategy capitalizes on the fact that tax rates vary across different activities.
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38
Implicit taxes may reduce the benefits of the conversion strategy.
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39
Which is not a basic tax planning strategy?

A)Income shifting.
B)Timing.
C)Conversion.
D)Arm's length transaction.
E)None of the choices are correct.
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40
Tax avoidance is a legal activity that forms the basis of the basic tax planning strategies.
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41
Which of the following does not limit the benefits of deferring income?

A)Increasing tax rates.
B)A taxpayer with severe cash flow needs.
C)If continuing an investment would generate a low rate of return.
D)If continuing an investment would subject the taxpayer to unnecessary risk.
E)None of the choices are correct.
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42
Rolando's employer pays year-end bonuses each year on December 31.Rolando, a cash-basis taxpayer, would prefer not to pay tax on his bonus this year.So, he leaves town on December 31, 2018, and doesn't pick up his check until January 2, 2019.When should Rolando report his bonus?

A)2019.
B)2018.
C)Rolando can choose the year to report the income.
D)it does not matter.
E)None of the choices are correct.
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43
If Thomas has a 37 percent tax rate and a 6 percent after-tax rate of return, $50,000 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)$50,000.
B)$18,500.
C)$37,350.
D)$13,820
E)None of the choices are correct.
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44
If tax rates are increasing:

A)taxpayers should accelerate income.
B)taxpayers should defer deductions.
C)taxpayers should defer income.
D)you need more information to make a recommendation.
E)None of the choices are correct.
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45
Which of the following increases the benefits of income deferral?

A)Increasing tax rates.
B)Smaller after-tax rate of return.
C)Larger after-tax rate of return.
D)Smaller magnitude of transactions.
E)None of the choices are correct.
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46
If tax rates are decreasing:

A)taxpayers should accelerate income.
B)taxpayers should defer deductions.
C)taxpayers should accelerate deductions.
D)taxpayers should defer deductions and accelerate income.
E)None of the choices are correct.
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47
If Julius has a 32 percent tax rate and a 10 percent after-tax rate of return, a $40,000 tax deduction in two years will save how much tax in today's dollars? Use Exhibit 3.1.(Round discount factor(s)to three decimal places.)

A)$40,000.
B)$10,573.
C)$33,040.
D)$12,800.
E)None of the choices are correct.
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48
If Lucy earns a 6 percent after-tax rate of return, $8,000 received in four years is worth how much today? Use Exhibit 3.1.(Round discount factor(s)to three decimal places.)

A)$8,000.
B)$7,544.
C)$8,989.
D)$6,336.
E)None of the choices are correct.
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49
Which of the following is not required to determine the best timing strategy?

A)The taxpayer's after-tax rate of return.
B)The taxpayer's tax rate this year.
C)The taxpayer's tax rate in future years.
D)The taxpayer's tax rate last year.
E)None of the choices are correct.
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50
If Jim invested $100,000 in an annual dividend-paying stock today with a 7 percent return, what investment time period will give Jim the greatest after-tax return?

A)1 year.
B)5 years.
C)10 years.
D)20 years.
E)All yield the same after-tax return.
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51
Which of the following decreases the benefits of accelerating deductions?

A)Decreasing tax rates.
B)Smaller after-tax rate of return.
C)Larger after-tax rate of return.
D)Larger magnitude of transactions.
E)None of the choices are correct.
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52
Which of the following tax planning strategies is based on the present value of money?

A)timing.
B)tax avoidance.
C)income shifting.
D)conversion.
E)None of the choices are correct.
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53
If Rudy has a 25 percent tax rate and a 6 percent after-tax rate of return, a $30,000 tax deduction in four years will save how much tax in today's dollars? Use Exhibit 3.1.(Round discount factor(s)to three decimal places.)

A)$30,000.
B)$7,500.
C)$23,760.
D)$5,940.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
54
Assuming a positive interest rate, the present value of money suggests:

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.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
55
If Nicolai earns an 8 percent after-tax rate of return, $20,000 today would be worth how much to Nicolai in five years? Use future value of $1.(Round discount factor(s)to four decimal places.)

A)$20,000.
B)$13,620.
C)$18,520.
D)$21,600.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
56
The constructive receipt doctrine:

A)is particularly restrictive for accrual-basis taxpayers.
B)causes income to be recognized before it is actually received.
C)causes income to be recognized after it is actually received.
D)applies equally to income and expenses.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
57
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.(Round discount factor(s)to three decimal places.)

A)$4,131.
B)$18,775.
C)$5,500.
D)$25,000.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
58
If tax rates are decreasing:

A)taxpayers should accelerate income.
B)taxpayers should defer deductions.
C)taxpayers should defer income.
D)taxpayers should defer deductions and accelerate income.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
59
If Scott earns a 12 percent after-tax rate of return, $15,000 today would be worth how much to Scott in two years? Use future value of $1.(Round discount factor(s)to five decimal places.)

A)$15,000.
B)$11,955.
C)$18,520.
D)$18,816.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
60
If Joel earns a 10 percent after-tax rate of return, $10,000 received in two years is worth how much today? Use Exhibit 3.1.(Round discount factor(s)to three decimal places.)

A)$10,000.
B)$9,090.
C)$8,260.
D)$11,000.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
61
Assume that Javier is indifferent between investing in a city of El Paso bond that pays 5 percent interest and a corporate bond that pays 6.25 percent interest.What is Javier's marginal tax rate?

A)50 percent.
B)40 percent.
C)30 percent.
D)20 percent.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
62
Which of the following is an example of the income-shifting strategy?

A)A corporation paying its shareholders a $20,000 dividend.
B)A corporation paying its owner a $20,000 salary.
C)A high tax rate taxpayer investing in tax-exempt municipal bonds.
D)A cash-basis business delaying billing its customers until after year-end.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
63
Assume that Lavonia's marginal tax rate is 22 percent.If a city of Tampa bond pays 5 percent interest, what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

A)22 percent.
B)5 percent.
C)7 percent.
D)3)9 percent.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
64
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?

A)32.00 percent
B)15.00 percent.
C)8)00 percent.
D)6)80 percent.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
65
Which of the following is needed to implement the income-shifting strategy?

A)Taxpayers with varying tax rates.
B)Decreasing tax rates.
C)Increasing tax rates.
D)Unrelated taxpayers.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
66
Assume that Keisha's marginal tax rate is 37 percent and her tax rate on dividends is 15 percent.If a city of Atlanta bond pays 7.65 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?

A)15.00 percent.
B)10.00 percent.
C)9)00 percent.
D)7)65 percent.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
67
Which of the following is an example of the timing strategy?

A)A cash-basis taxpayer paying all outstanding bills by year-end.
B)A parent employing her child in the family business.
C)A business paying its owner a $30,000 salary.
D)A taxpayer investing in a tax-preferred investment.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
68
Which of the following does not limit the income-shifting strategy?

A)Assignment of income doctrine.
B)Business purpose doctrine.
C)Substance-over-form doctrine.
D)Step-transaction doctrine.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
69
Which of the following is an example of the timing strategy?

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.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
70
Assume that Marsha is indifferent between investing in a city of Destin bond that pays 6 percent interest and a corporate bond that pays 8 percent interest.What is Marsha's marginal tax rate?

A)50 percent.
B)40 percent.
C)30 percent.
D)20 percent.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
71
Jason's employer pays year-end bonuses each year on December 31.Jason, a cash-basis taxpayer, would prefer not to pay tax on his bonus this year (and actually would prefer his daughter to pay tax on the bonus).So, he leaves town on December 31, 2018, and has his daughter, Julie, pick up his check on January 2, 2019.Who reports the income and when?

A)Julie in 2018.
B)Julie in 2019.
C)Jason in 2018.
D)Jason in 2019.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
72
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?

A)37.00 percent.
B)9)52 percent.
C)6)00 percent.
D)3)78 percent.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
73
Assume that Larry's marginal tax rate is 24 percent.If corporate bonds pay 10 percent interest, what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

A)24.00 percent.
B)12.00 percent.
C)10.00 percent.
D)7)60 percent.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
74
A common income-shifting strategy is to:

A)shift income from low tax rate taxpayers to high tax rate taxpayers.
B)shift deductions from low tax rate taxpayers to high tax rate taxpayers.
C)shift deductions from high tax rate taxpayers to low tax rate taxpayers.
D)accelerate tax deductions.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
75
Which of the following is more likely to receive IRS scrutiny under the assignment of income doctrine?

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.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
76
A taxpayer paying his 10-year-old daughter $50,000 a year for consulting likely violates which doctrine?

A)Constructive receipt doctrine.
B)Implicit tax doctrine.
C)Substance-over-form doctrine.
D)Step-transaction doctrine.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
77
Which of the following may limit the conversion strategy?

A)Implicit taxes.
B)Assignment of income doctrine.
C)Constructive receipt doctrine.
D)Activities with preferential tax rates.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
78
Which of the following is an example of the conversion strategy?

A)A corporation paying its shareholders a $20,000 dividend.
B)A corporation paying its owner a $20,000 salary.
C)A high tax rate taxpayer investing in tax exempt municipal bonds.
D)A cash-basis business delaying billing its customers until after year end.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
79
Assume that Bill's marginal tax rate is 32 percent.If corporate bonds pay 8 percent interest, what interest rate would a municipal bond have to offer for Bill to be indifferent between the two bonds?

A)32.00 percent.
B)10.40 percent.
C)8)00 percent.
D)7)00 percent.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
80
A taxpayer instructing her son to collect rent checks for the taxpayer's property and to report this as taxable income on the son's tax return violates which doctrine?

A)Constructive receipt doctrine.
B)Implicit tax doctrine.
C)Assignment of income doctrine.
D)Step-transaction doctrine.
E)None of the choices are correct.
Unlock Deck
Unlock for access to all 115 flashcards in this deck.
Unlock Deck
k this deck
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Unlock Deck
Unlock for access to all 115 flashcards in this deck.