Deck 11: Tax Planning

Question 1

Which of the following are the twopervasive judicial doctrines that often limit the taxpayer's ability toemploy effective planning techniques?

A)the progressive tax rate requirement and marginal rates
B)business purpose and substance over form
C)business purpose and changing tax jurisdiction
D)all of these are judicial doctrines that limit effective tax planning

Answer 1

B

Question 2

Allowing an investment toincrease in value without selling it is an example of tax planning by:

A)changing the timing of recognition of taxable income
B)changing the character of income
C)spreading income among related parties
D)none of these are correct

Answer 2

A

Question 3

Which of the following tax law rules creates incentives for tax planning?

A)The federal income tax itself is deductible in determining taxable income.
B)Reducing the amount of income tax that is paid decreases a taxpayer's allowable deductions.
C)The federal income tax itself is not allowed as a deduction in determining taxable income.
D)None of these are correct.

Answer 3

C

Question 4

Under a progressive tax rate system, the applicable tax rate:

A)is applied against the taxpayer's net holdings of tangible assets
B)decreases as the tax base grows larger
C)increases as the tax base grows larger
D)is independent of the tax base

Question 5

Which of the following is the basic formula for computing a taxpayer's tax liability?

A)Tax Liability = Tax Base ÷ Tax Rate
B)Tax Liability = Tax Base × (1 - Tax Rate)
C)Tax Liability = Tax Base × Tax Rate
D)None of these are correct

Question 6

Which of the following is a feature of a properly accomplished tax planning?

A)It allows the tax professional toexercise a higher degree of creativity.
B)It forces the client toidentify financial goals and general means by which toachieve them.
C)It affords the practitioner the greatest possible degree of control over the prescribed transactions and the tax consequences.
D)All of these are correct.

Question 7

Most sales and property taxes in the United States employ a:

A)proportional rate structure
B)regressive rate structure
C)progressive rate structure
D)consumption rate structure

Question 8

Often, by moving assets or income out of one government authority into another, tax reductions can be affected. This process is called:

A)changing the timing of recognition of income
B)changing the timing of recognition of deductions
C)deferring the payment of tax
D)changing tax jurisdictions

Question 9

Taxpayers are rewarded more for finding ways tosave taxes than for earning an equal amount in the marketplace.

Question 10

Which of the following is the most common tax that is found in contemporary industrialized societies?

A)a tax on consumption
B)a proportional tax
C)a tax on income
D)none of these are correct

Question 11

Which of the following tax rate systems is applicable tothe U.S. individual income tax?

A)proportional tax rate system
B)regressive tax rate system
C)progressive tax rate system
D)none of these are correct

Question 12

A proportional tax rate system represents:

A)a progressive tax rate structure
B)a flat tax rate structure
C)the U.S. federal income tax system
D)none of these are correct

Question 13

The tax rate that is the present value of the additional tax on one dollar of additional taxable income is referred toas the:

A)nominal tax rate
B)effective tax rate
C)before-tax cost
D)none of these are correct

Question 14

The tax rate which is computed by simply dividing the total tax liability by the corresponding tax base is known as the:

A)capital gains tax rate
B)average tax rate
C)effective tax rate
D)marginal tax rate

Question 15

Choosing tax-free fringe benefits instead of an equivalent hike in salary is an example of tax planning by:

A)accelerating income recognition
B)changing the timing of recognition of taxable income
C)avoiding income recognition
D)all of these are correct

Question 16

Investing in non-dividend-paying stock that is expected toappreciate yearly by 5 percent instead of investing in 5 percent corporate bonds is an example of tax planning by:

A)spreading income through portfoliodiversification
B)avoiding income recognition
C)changing the timing of recognition of taxable income
D)changing the character of income

Question 17

Taxpayers often can legally reduce their exposure totaxation by:

A)avoiding the recognition of taxable income
B)deducting federal taxes
C)not appearing before tax officials
D)postponing deductions

Question 18

Tax planning:

A)is a completely legal means for saving taxes
B)is the same as tax evasion
C)endeavors tounderstate the taxpayer's real wealth
D)all of these are correct

Question 19

Where ATC = after-tax cost, BTC = before-tax cost, and MTR = marginal tax rate, the after-tax cost of tax planning can be expressed as:

A)ATC = BTC ×  (1 - MTR)
B)a factor of the time value of money
C)MTR × taxable income = ATC
D)ATC = BTC ÷ (1 - MTR)

Question 20

Under a regressive tax rate structure, the applicable tax rate:

A)increases as the tax base grows larger
B)remains unchanged irrespective of the level of the tax base
C)best reflects the capacity of the taxpayer topay
D)decreases as the tax base grows larger

Question 21

The progressive nature of the tax system tends toincrease the advantage of income splitting.

Question 22

With respect totax planning activities, the decision maker must compare the after-tax benefits with the pretax costs.

Question 23

Harrison is subject toa 40 percent overall marginal tax rate. Is he better off if he receives a tax-free fringe benefit of $4,000 than if he receives an equivalent increase in his salary? Why or why not?

Question 24

Taxpayers can use the step-transaction doctrine toobtain various tax advantages.

Question 25

Identify the five goals of tax planning behavior and give an example of each.

Question 26

Whenever a series of transactions results in significant tax savings, the IRS may attempt toapply the concept of substance over form by collapsing several transactions intoone.

Question 27

Spreading income among related taxpayers is one of the goals of tax planning behavior.

Question 28

Tax planning has been said tooffer an opportunity for the most psychologically and financially rewarding work in tax practice. What is it about tax planning that would lead one tothis conclusion?

Question 29

Tax planning analyses should be based on the average tax rates that the individual will pay or save by adopting a particular course of action.

Question 30

A corporate taxpayer, whois subject toa marginal state and federal tax rate of 30 percent, is considering twomutually exclusive alternatives. Alternative A is tohire a public accounting firm at a cost of $5,000 toundertake research on a tax avoidance plan. If the plan is successful, it will save the corporation $4,900 in federal income taxes. The probability of success for the plan is 75 percent. Alternative B is tohire a marketing firm at a cost of $4,500 todevelop a new marketing strategy. If it is successful, the new marketing strategy would generate new revenues of $5,500. The probability of such success is 80 percent.
Which alternative should the corporation choose?

Question 31

Under a proportional tax rate system, the tax rate is constant.

Question 32

When tax rates are constant, delaying income recognition or accelerating deductions can be beneficial.

Question 33

a)Michael formed a new corporation by investing $200,000 cash. Following the advice of his tax consultant, Michael designated $120,000 tobe used for the purchase of corporate stock and $80,000 as a loan tothe corporation. What tax advantage does this arrangement have over structuring the entire investment as a purchase of stock? Explain.
b)Dorothy has $30,000 toinvest and is considering a corporate bond that pays 7 percent annual interest or a non-dividend-paying stock that is expected toappreciate by 7 percent each year. Given that both investments are of similar risk, and the long-term capital gains tax rate is lower than the ordinary income tax rate, which option should Dorothy choose? Why?
c)Gabriel is the sole shareholder of a management-consulting corporation. In addition, he has invested in passive rental activities that generate $20,000 per year in passive losses. According tothe Code, such losses from passive activities cannot be applied as deductions tooffset other types of taxable income. Advise Gabriel as tohow he can salvage the $20,000 deduction.

Question 34

Taxpayers can always minimize their tax liability simply by moving income and assets out of one jurisdiction toanother.

Question 35

Any business-related expenses that are incurred in connection with the determination of a tax are deductible.

Question 36

What is a statutory tax trap? Give an example.

Question 37

The effective average tax rate can be found by dividing the total tax liability by the economic income.

Question 38

The judicial doctrine "business purpose" can decrease the taxpayer's ability toemploy effective planning techniques.