Deck 12: Tax Planning

Question 1

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

Answer 1

D

Question 2

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

Answer 2

C

Question 3

Allowing an investment to increase 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 3

A

Question 4

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 to pay
D)decreases as the tax base grows larger

Question 5

Jeffrey Heinz, a salaried person, incurred a loss of $4,000 from passive activities. This loss can be applied as a deduction to offset taxable income from:

A)his salary
B)his long-term capital gains for the year
C)passive activities
D)any source

Question 6

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.

Question 7

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

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

Question 8

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 9

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 10

Taxpayers often can legally reduce their exposure to taxation by:

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

Question 11

Which of the following tax rate systems is applicable to the 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

Social Security Taxes are considered:

A)progressive
B)flat
C)regressive
D)proportional

Question 13

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 14

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 15

Jane owns land adjacent to her home that appreciated in value by $5,000 this year. She acquired the land five years ago for $25,000. Based on these facts alone, the amount that would be included in her taxable income for the current year is:

A)$30,000
B)$25,000
C)$5,000
D)$0

Question 16

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 17

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

A)It allows the tax professional to exercise a higher degree of creativity.
B)It forces the client to identify financial goals and general means by which to achieve 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 18

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 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

Tax planning:

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

Question 21

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

Question 22

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

Question 23

For 2016, the amount of exemption that a child can enjoy on any interest, dividends, or capital gains income is limited to:

A)$1,050
B)$1,900
C)$10,000
D)There is no exemption for this type of income.

Question 24

What is the age at which children who are not full-time students are no longer subject to the "kiddie" tax?

A)24
B)18
C)19
D)none of these are correct

Question 25

With regard to employers, generally, salary payments to employees are deductible but fringe benefit payments are not.

Question 26

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

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

Question 27

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

Question 28

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

Question 29

The "Child Tax Credit" was created to prevent parents from sheltering income by putting accounts in the names of their lower-taxed children.

Question 30

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 31

The first requirement for effective tax planning is awareness on the part of decision makers.

Question 32

Investment expenses can offset ordinary income.

Question 33

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

Question 34

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

Question 35

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

Question 36

Which of the following are the two pervasive judicial doctrines that often limit the taxpayer's ability to employ 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

Question 37

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

Question 38

Whenever a series of transactions results in significant tax savings, the IRS may attempt to apply the concept of substance over form by collapsing several transactions into one.

Question 39

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

Question 40

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

Question 41

Harrison is subject to a 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 raise in his salary? Why or why not?

Question 42

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

Question 43

A corporate taxpayer, who is subject to a marginal state and federal tax rate of 30 percent, is considering two mutually exclusive alternatives. Alternative A is to hire a public accounting firm at a cost of $5,000 to undertake 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 to hire a marketing firm at a cost of $4,500 to develop 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 44

What is a statutory tax trap? Give an example.

Question 45

a) Michael formed a new corporation by investing $200,000 cash. Following the advice of his tax consultant, Michael designated $120,000 to be used for the purchase of corporate stock and $80,000 as a loan to the corporation. What tax advantage does this arrangement have over structuring the entire investment as a purchase of stock? Explain.​b) Dorothy has $30,000 to invest and is considering a corporate bond that pays 7 percent annual interest or a non-dividend-paying stock that is expected to appreciate 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 to the Code, such losses from passive activities cannot be applied as deductions to offset other types of taxable income. Advise Gabriel as to how he can salvage the $20,000 deduction.

Question 46

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

Question 47

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