Deck 3: Tax Planning Strategies and Related Limitations

Question 1

When considering cash outflows, higher present values are preferred.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

The goal of tax planning is tax minimization.

Question 5

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

Question 6

The timing strategy becomes more attractive as tax rates decrease.

Question 7

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

Question 8

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 9

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

Question 10

Tax savings generated from deductions are considered cash inflows.

Question 11

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

Question 12

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

Question 13

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

Question 14

The timing strategy is particularly effective for cash basis taxpayers.

Question 15

In general, tax planners prefer to accelerate deductions.

Question 16

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

Question 17

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

Question 18

When considering cash inflows, higher present values are preferred.

Question 19

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

Question 20

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

Question 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.

Question 22

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

Question 23

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

Question 24

Which of the following strategies is based on the present value of money?

A) timing
B) tax avoidance
C) income shifting
D) conversion
E) None of these

Question 25

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

Question 26

The rewards of tax avoidance include stiff monetary penalties and imprisonment.

Question 27

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

Question 28

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

Question 29

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 these

Question 30

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

Question 31

Implicit taxes may reduce the benefits of the conversion strategy.

Question 32

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

Question 33

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 these

Question 34

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

Question 35

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

Question 36

The income shifting strategy requires taxpayers with varying tax rates.

Question 37

Which is not a basic tax planning strategy?

A) income shifting
B) timing
C) conversion
D) arms length transaction
E) None of these

Question 38

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

Question 39

Effective tax planning does not require consideration of:

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) None of these

Question 40

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

Question 41

If Thomas has a 40% tax rate and a 6% after-tax rate of return, $50,000 of income in five years will cost him how much tax in today's dollars (rounded)?

A) $50,000
B) $20,000
C) $37,350
D) $14,940
E) None of these

Question 42

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 these

Question 43

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 these

Question 44

If Joel earns a 10% after-tax rate of return, $10,000 received in two years is worth how much today (rounded)?

A) $10,000
B) $9,090
C) $8,260
D) $11,000
E) None of these

Question 45

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 these

Question 46

If Julius has a 20% tax rate and a 10% after-tax rate of return, $25,000 of income in three years will cost him how much tax in today's dollars (rounded)?

A) $3,755
B) $18,775
C) $5,000
D) $25,000
E) None of these

Question 47

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 these

Question 48

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 these

Question 49

If Lucy earns a 6% after-tax rate of return, $8,000 received in four years is worth how much today?

A) $8,000
B) $7,544
C) $8,989
D) $6,336
E) None of these

Question 50

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 these

Question 51

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 these

Question 52

If Rudy has a 25% tax rate and a 6% after-tax rate of return, a $30,000 tax deduction in four years will save how much tax in today's dollars (rounded)?

A) $30,000
B) $7,500
C) $28,290
D) $5,940
E) None of these

Question 53

If Scott earns a 12% after-tax rate of return, $15,000 today would be worth how much to Scott in 2 years?

A) $15,000
B) $11,955
C) $18,520
D) $18,816
E) None of these

Question 54

Rolando's employer pays year-end bonuses each year on December 31. Rolando, a cash basis taxpayer, would prefer to not pay tax on his bonus this year. So, he leaves town on December 31, 2014 and doesn't pick up his check until January 2nd, 2015. When should Rolando report his bonus?

A) 2015
B) 2014
C) Rolando can choose the year to report the income
D) It does not matter
E) None of these

Question 55

If Nicolai earns an 8% after-tax rate of return, $20,000 today would be worth how much to Nicolai in 5 years?

A) $20,000
B) $13,620
C) $18,520
D) $21,600
E) None of these

Question 56

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 these

Question 57

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 these

Question 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 these

Question 59

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 these

Question 60

If Julius has a 30% tax rate and a 10% after-tax rate of return, a $40,000 tax deduction in two years will save how much tax in today's dollars (rounded)?

A) $40,000
B) $9,912
C) $33,040
D) $12,000
E) None of these

Question 61

Jason's employer pays year-end bonuses each year on December 31. Jason, a cash basis taxpayer, would prefer to not 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, 2014 and has his daughter, Julie, pick up his check on January 2nd, 2015. Who reports the income and when?

A) Julie in 2014
B) Julie in 2015
C) Jason in 2014
D) Jason in 2015
E) None of these

Question 62

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 these

Question 63

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 these

Question 64

Assume that Lucas' marginal tax rate is 30% and his tax rate on dividends is 15%. If a dividend-paying stock (with no growth potential) pays an 8% dividend yield, what interest rate would a municipal bond have to offer for Lucas to be indifferent between the two investments?

A) 30%
B) 15%
C) 8%
D) 6.8%
E) None of these

Question 65

Assume that Lavonia's marginal tax rate is 20%. If a city of Tampa bond pays 5% interest, what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

A) 20%
B) 8%
C) 7%
D) 4%
E) None of these

Question 66

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

A) 50%
B) 40%
C) 30%
D) 20%
E) None of these

Question 67

Assume that Jose is indifferent between investing in a corporate bond that pays 10% interest and a stock with no growth potential that pays an 8% dividend yield. Assume that the tax rate on dividends is 15%. What is Jose's marginal tax rate?

A) 47%
B) 37%
C) 32%
D) 15%
E) None of these

Question 68

Assume that John's marginal tax rate is 40%. If a city of Austin bond pays 6% interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds?

A) 30%
B) 10%
C) 6%
D) 3.6%
E) None of these

Question 69

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 these

Question 70

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 these

Question 71

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 these

Question 72

Assume that Javier is indifferent between investing in a city of El Paso bond that pays 5% interest and a corporate bond that pays 6.25% interest. What is Javier's marginal tax rate?

A) 50%
B) 40%
C) 30%
D) 20%
E) None of these

Question 73

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 these

Question 74

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 these

Question 75

Assume that Keisha's marginal tax rate is 40% and her tax rate on dividends is 15%. If a city of Atlanta bond pays 7.65% 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?

A) 15%
B) 10%
C) 9%
D) 7.65%
E) None of these

Question 76

Assume that Shavonne's marginal tax rate is 50% and her tax rate on dividends is 15%. If a corporate bond pays 10.2% interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Shavonne to be indifferent between the two investments?

A) 6%
B) 7%
C) 10.2%
D) 15%
E) None of these

Question 77

Assume that Bill's marginal tax rate is 30%. If corporate bonds pay 8% interest, what interest rate would a municipal bond have to offer for Bill to be indifferent between the two bonds?

A) 30%
B) 10.4%
C) 8%
D) 7%
E) None of these

Question 78

Assume that Will's marginal tax rate is 32% and his tax rate on dividends is 15%. If a dividend-paying stock (with no growth potential) pays a dividend yield of 8%, what interest rate must the corporate bond offer for Will to be indifferent between the two investments?

A) 12%
B) 11%
C) 10%
D) 8%
E) None of these

Question 79

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 these

Question 80

Assume that Larry's marginal tax rate is 25%. If corporate bonds pay 10% interest, what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

A) 25%
B) 12.5%
C) 10%
D) 7.5%
E) None of these