Deck 3: Tax Planning Strategies and Related Limitations

Question 1

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.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

When considering cash inflows, higher present values are preferred.

Answer 3

True

Question 4

The timing strategy becomes more attractive as tax rates decrease.

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

In general, tax planners prefer to accelerate deductions.

Question 10

The goal of tax planning is tax minimization.

Question 11

The timing strategy is particularly effective for cash basis taxpayers.

Question 12

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

Question 13

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

Question 14

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

Question 15

Tax savings generated from deductions are considered cash inflows.

Question 16

When considering cash outflows, higher present values are preferred.

Question 17

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

Question 18

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

Question 19

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.

Question 20

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

Question 21

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

Question 22

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

Question 23

Investors must consider complicit taxes as well as explicit taxes in order to make correct investment choices.

Question 24

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

Question 25

The goal of tax planning generally is to:

A) minimize taxes.
B) maximize after-tax wealth.
C) minimize IRS scrutiny.
D) support the Federal government.
E) None of the choices are correct.

Question 26

Implicit taxes may reduce the benefits of the conversion strategy.

Question 27

Which is not a basic tax planning strategy?

A) Income shifting.
B) Arms-length transaction.
C) Conversion.
D) Timing.
E) None of the choices are correct.

Question 28

Effective tax planning requires all of these considerations except:

A) the other party's tax costs of alternative transactions.
B) nontax factors.
C) the other party's nontax costs of alternative transactions.
D) the taxpayer's tax costs of alternative transactions.
E) All of the choices are required considerations.

Question 29

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

Question 30

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

Question 31

The income shifting strategy requires taxpayers with varying tax rates.

Question 32

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

Question 33

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

Question 34

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 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

An investment's time horizon does not affect after-tax rates of return on investments taxed annually.

Question 41

If tax rates are increasing:

A) taxpayers should accelerate income.
B) need more information to make a recommendation.
C) taxpayers should defer deductions.
D) taxpayers should defer income.
E) None of the choices are correct.

Question 42

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) 5 years.
B) 20 years.
C) 1 year.
D) 10 years.
E) All yield the same after-tax return.

Question 43

Which of the following is not required to determine the best timing strategy?

A) The taxpayer's tax rate this year.
B) The taxpayer's tax rate in future years.
C) The taxpayer's tax rate last year.
D) The taxpayer's after-tax rate of return.
E) None of the choices are correct.

Question 44

If tax rates are decreasing:

A) taxpayers should accelerate deductions.
B) taxpayers should defer deductions.
C) taxpayers should accelerate income.
D) taxpayers should defer deductions and accelerate income.
E) None of the choices are correct.

Question 45

Which of the following does not limit the benefits of deferring income?

A) A taxpayer with severe cash flow needs.
B) If continuing an investment would generate a low rate of return.
C) If continuing an investment would subject the taxpayer to unnecessary risk.
D) Increasing tax rates.
E) None of the choices are correct.

Question 46

Which of the following increases the benefits of income deferral?

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

Question 47

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) Implicit tax doctrine.
B) Step-transaction doctrine.
C) Assignment of income doctrine.
D) Constructive receipt doctrine.
E) None of the choices are correct.

Question 48

Which of the following decreases the benefits of accelerating deductions?

A) Decreasing tax rates.
B) Larger magnitude of transactions.
C) Larger after-tax rate of return.
D) Smaller after-tax rate of return.
E) None of the choices are correct.

Question 49

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

A) $1 today > $1 in one year.
B) $1 today Ç $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 50

Which of the following is needed to implement the income shifting strategy?

A) Taxpayers with varying tax rates.
B) Increasing tax rates.
C) Decreasing tax rates.
D) Unrelated taxpayers.
E) None of the choices are correct.

Question 51

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

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

Question 52

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, 2016 and has his daughter, Julie, pick up his check on January 2, 2017. Who reports the income and when?

A) Jason in 2017.
B) Julie in 2016.
C) Jason in 2016.
D) Julie in 2017.
E) None of the choices are correct.

Question 53

Which of the following does not limit the income shifting strategy?

A) Assignment of income doctrine.
B) Business purpose doctrine.
C) Step-transaction doctrine.
D) Substance-over-form doctrine.
E) None of the choices are correct.

Question 54

If tax rates are decreasing:

A) taxpayers should defer deductions and accelerate income.
B) taxpayers should defer income.
C) taxpayers should accelerate income.
D) taxpayers should defer deductions.
E) None of the choices are correct.

Question 55

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, 2016 and doesn't pick up his check until January 2, 2017. When should Rolando report his bonus?

A) 2016.
B) it does not matter.
C) Rolando can choose the year to report the income.
D) 2017.
E) None of the choices are correct.

Question 56

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 taxpayer investing in a tax preferred investment.
C) A parent employing her child in the family business.
D) A business paying its owner a $30,000 salary.
E) None of the choices are correct.

Question 57

The constructive receipt doctrine:

A) applies equally to income and expenses.
B) causes income to be recognized after it is actually received.
C) is particularly restrictive for accrual basis taxpayers.
D) causes income to be recognized before it is actually received.
E) None of the choices are correct.

Question 58

Which of the following is an example of the timing strategy?

A) A corporation paying its shareholders a $20,000 dividend.
B) A taxpayer gifting stock to his children.
C) A cash-basis business delaying billing its customers until after year end.
D) A parent employing her child in the family business.
E) None of the choices are correct.

Question 59

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

A) Constructive receipt doctrine.
B) Step-transaction doctrine.
C) Substance-over-form doctrine.
D) Implicit tax doctrine.
E) None of the choices are correct.

Question 60

A common income shifting strategy is to:

A) shift deductions from low tax rate taxpayers to high tax rate taxpayers.
B) shift deductions from high tax rate taxpayers to low tax rate taxpayers.
C) accelerate tax deductions.
D) shift income from low tax rate taxpayers to high tax rate taxpayers.
E) None of the choices are correct.

Question 61

Which of the following is an example of the conversion strategy?

A) A high tax rate taxpayer investing in tax exempt municipal bonds.
B) A corporation paying its owner a $20,000 salary.
C) A corporation paying its shareholders a $20,000 dividend.
D) A cash-basis business delaying billing its customers until after year end.
E) None of the choices are correct.

Question 62

Which of the following is an example of the income shifting strategy?

A) A high tax rate taxpayer investing in tax exempt municipal bonds.
B) A corporation paying its owner a $20,000 salary.
C) A cash-basis business delaying billing its customers until after year end.
D) A corporation paying its shareholders a $20,000 dividend.
E) None of the choices are correct.

Question 63

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 from a cash-flow perspective?

A) 15%.
B) 10%.
C) 7.65%.
D) 9%.
E) None of the choices are correct.

Question 64

Assume that Juanita is indifferent between investing in a corporate bond that pays 10.2% 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?

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

Question 65

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, whatinterest rate would a municipal bond have to offer for Lucas to be indifferent between the two investments from a cash-flow perspective?

A) 8%.
B) 6.8%.
C) 15%.
D) 30%.
E) None of the choices are correct.

Question 66

Assume that Marsha is indifferent between investing in a city of Destin bond that pays6% interest and a corporate bond that pays 8% interest. What is Marsha's marginal tax rate?

A) 40%.
B) 50%.
C) 20%.
D) 30%.
E) None of the choices are correct.

Question 67

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) 7.50%.
B) 10.00%.
C) 12.50%.
D) 25.00%.
E) None of the choices are correct.

Question 68

Investing in municipal bonds to avoid paying tax on interest earned and to earn a higher after-tax yield is an example of:

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

Question 69

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) 6.00%.
B) 10.00%.
C) 3.60%.
D) 30.00%.
E) None of the choices are correct.

Question 70

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-payingstock (with no growth potential) have to offer for Shavonne to be indifferent between the two investments from a cash-flow perspective?

A) 10.2%.
B) 6%.
C) 15%.
D) 7%.
E) None of the choices are correct.

Question 71

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) 30.00%.
B) 7.00%.
C) 10.40%.
D) 8.00%.
E) None of the choices are correct.

Question 72

Which of the following may limit the conversion strategy?

A) Constructive receipt doctrine.
B) Implicit taxes.
C) Activities with preferential tax rates.
D) Assignment of income doctrine.
E) None of the choices are correct.

Question 73

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?

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

Question 74

If Tom invests $60,000 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.

A) $79,621; $121,716.
B) $92,782; $178,414.
C) $88,647; $159,198.
D) $77,495; $113,750.
E) None of the choices are correct.

Question 75

Assume that Javier is indifferent between investing in a city of El Paso bond that pays5% interest and a corporate bond that pays 6.25% interest. What is Javier's marginal tax rate?

A) 40%.
B) 50%.
C) 20%.
D) 30%.
E) None of the choices are correct.

Question 76

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) 8%.
B) 7%.
C) 20%.
D) 4%.
E) None of the choices are correct.

Question 77

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

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

Question 78

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) 37%.
B) 15%.
C) 32%.
D) 47%.
E) None of the choices are correct.

Question 79

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

A) A cash-basis business delaying billing its customers until after year end.
B) A taxpayer gifting stock to his children.
C) A parent employing her child in the family business.
D) A corporation paying its shareholders a $20,000 dividend.
E) None of the choices are correct.

Question 80

The income shifting and timing strategies are examples of:

A) illegal taxpayer strategies.
B) tax evasion.
C) tax avoidance.
D) All of the choices are correct.
E) None of the choices are correct.