Deck 3: Tax Planning Strategies and Related Limitations

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 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.

Answer 3

True

Question 4

The timing strategy is particularly effective for cash-basis taxpayers.

Question 5

When considering cash outflows, higher present values are preferred.

Question 6

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

Question 7

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

Question 8

When considering cash inflows, higher present values are preferred.

Question 9

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

Question 10

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

Question 11

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

Question 12

Tax savings generated from deductions are considered cash inflows.

Question 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.

Question 14

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

Question 15

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

Question 16

The timing strategy becomes more attractive as tax rates decrease.

Question 17

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

Question 18

In general, tax planners prefer to accelerate deductions.

Question 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.

Question 20

The goal of tax planning is tax minimization.

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

Question 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.

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

The income-shifting strategy requires taxpayers with varying tax rates.

Question 34

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

Question 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.

Question 36

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

Question 37

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

Question 38

Implicit taxes may reduce the benefits of the conversion strategy.

Question 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.

Question 40

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

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

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 the choices are correct.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.

Question 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.