Question 1

Which of the following increases the benefits of income deferral?

Accepted Answer

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. C

Question 2

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 
D)   $1 today ≤ $1 in one year.
E)   None of the choices are correct. B

Question 3

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 from a cash-flow perspective?

Accepted Answer

A)   12%.
B)   11%.
C)   10%.
D)   8%.
E)   None of the choices are correct. C

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Paying "fabricated" expenses in high tax rate years is an example of:

Accepted Answer

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

Question 6

Danny argues that tax accountants suffer from one-mindedness in their attempts at tax planning (i.e., reducing taxes at all costs). Is Danny's view of tax planning correct - i.e., does he understand what the goal of tax planning is? Please elaborate.

Accepted Answer

The answer of Danny argues that tax accountants suffer from...

Question 7

Tax savings generated from deductions are considered cash inflows.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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 from a cash-flow perspective?

Accepted Answer

A)   30.00%.
B)   15.00%.
C)   8.00%.
D)   6.80%.
E)   None of the choices are correct.

Question 11

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, 2017 and doesn't pick up his check until January 2, 2018. When should Rolando report his bonus?

Accepted Answer

A)   2018.
B)   2017.
C)   Rolando can choose the year to report the income.
D)   it does not matter.
E)   None of the choices are correct.

Question 12

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

Accepted Answer

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

Question 13

Compare and contrast the constructive receipt doctrine and the assignment of income doctrine.
In what situations do these doctrines apply? What tax planning strategies does each doctrine limit?

Accepted Answer

The answer of Compare and contrast the constructive receipt doctrine...

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

Assume that Juanita is indifferent between investing in a corporate bond that pays 10.20% interest and a stock with no growth potential that pays a 6% dividend yield. Assume that the tax rate on dividends is 15%. What is Juanita's marginal tax rate?

Accepted Answer

A)   50%.
B)   40%.
C)   30%.
D)   15%.
E)   None of the choices are correct.

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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.

Accepted Answer

A) True 
 B)False

Question 19

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. 
Exhibit 3.1.
a. Eddy has a 40% tax rate. Scott has a 30% tax rate.
b. Eddy and Scott each have a 40% 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% tax rate and $20,000 of income that could be deferred. Eddy's after-tax rate of return is 8%. Scott's after-tax rate of return is 10%.
d. Eddy and Scott each have a 40% tax rate, $20,000 of income that could be deferred, and an after-tax rate of return of 10%. Eddy can defer income up to 3 years. Scott can defer income up to 2 years.

Accepted Answer

The answer of Based only on the information provided for...

Question 20

The goal of tax planning is tax minimization.

Accepted Answer

A) True 
 B)False

Exam 3: Tax Planning Strategies and Related Limitations

Which of the following increases the benefits of income deferral?

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

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 from a cash-flow perspective?

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

Paying "fabricated" expenses in high tax rate years is an example of:

Danny argues that tax accountants suffer from one-mindedness in their attempts at tax planning (i.e., reducing taxes at all costs). Is Danny's view of tax planning correct - i.e., does he understand what the goal of tax planning is? Please elaborate.

Tax savings generated from deductions are considered cash inflows.

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

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

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, 2017 and doesn't pick up his check until January 2, 2018. When should Rolando report his bonus?

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

Compare and contrast the constructive receipt doctrine and the assignment of income doctrine. In what situations do these doctrines apply? What tax planning strategies does each doctrine limit?

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

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

Assume that Juanita is indifferent between investing in a corporate bond that pays 10.20% interest and a stock with no growth potential that pays a 6% dividend yield. Assume that the tax rate on dividends is 15%. What is Juanita's marginal tax rate?

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

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.

The goal of tax planning is tax minimization.