Question 1

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.

Accepted Answer

The answer of Assume that Javier is indifferent between investing...

Question 2

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.

Accepted Answer

Paying the owner a salary is an example of income-shifting strategy since the corporation can deduct the salary as an expense and the owner pays taxes on the income at a potentially lower rate than the corporation would have paid on the income. A dividend payment (A) does not allow for income-shifting since it is taxed at the individual level, and not deductible by the corporation. Investing in tax-exempt municipal bonds (C) is a tax planning strategy, but does not involve income-shifting. Delaying billing customers (D) is an example of income-deferral, not income-shifting.

Question 3

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.

Accepted Answer

To find the equivalent taxable interest rate that would make Lavonia indifferent between a tax-exempt bond (like a municipal bond from the city of Tampa) and a taxable bond (like a corporate bond), we use the formula: Taxable Interest Rate = Tax-Exempt Interest Rate / (1 - Marginal Tax Rate). Plugging in Lavonia's details: 5% / (1 - 0.22) = 5% / 0.78 ≈ 6.41%. Since none of the provided options matches this calculation, the correct answer is E) None of the choices are correct.

Question 4

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.

Accepted Answer

Since Lucas's marginal tax rate is 32 percent and his tax rate on dividends is 15 percent, the after-tax dividend yield would be: 
8% x (1-15%) = 6.8%
To find the comparable interest rate on a municipal bond, we need to divide the after-tax dividend yield (6.8%) by (1 - 32%), which is the after-tax yield he would receive from a taxable bond. 
6.8% / (1 - 32%) = 10%
Therefore, the interest rate on a municipal bond would have to be at least 10% for Lucas to be indifferent between the two investments from a cash-flow perspective. Since the answer choices are given in whole percentages, the closest answer is 6.80 percent.

Question 5

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.

Accepted Answer

The income-shifting strategy involves transferring income from a taxpayer in a higher tax bracket to a taxpayer in a lower tax bracket. Therefore, it requires taxpayers with varying tax rates.

Question 6

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.

Accepted Answer

The answer of Assume that Keisha's marginal tax rate is...

Question 7

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.

Accepted Answer

Paying all outstanding bills by year-end is an example of the timing strategy because it can help the taxpayer maximize deductions for the tax year. By paying bills before the end of the year, the taxpayer can claim the deductions on their current year tax return.

Question 8

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.

Accepted Answer

None of the listed options limit the income-shifting strategy.

Question 9

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.

Accepted Answer

The timing strategy involves manipulating when income is recognized or when expenses are incurred in order to reduce taxes. Delaying billing customers until after year-end is an example of this strategy because income is not recognized until the following year, which may result in a lower tax liability for the current year. Choices A, B, and C are not examples of timing strategies.

Question 10

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.

Accepted Answer

The answer of Assume that Marsha is indifferent between investing...

Question 11

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.

Accepted Answer

Jason, as a cash-basis taxpayer, must report the income in 2018 because the bonus was made available to him on December 31, 2018, regardless of when he actually picked it up.

Question 12

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.

Accepted Answer

The answer of Assume that John's marginal tax rate is...

Question 13

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.

Accepted Answer

The answer of Assume that Larry's marginal tax rate is...

Question 14

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.

Accepted Answer

The answer of A common income-shifting strategy is to:
A)shift income...

Question 15

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.

Accepted Answer

The assignment of income doctrine is a common law doctrine that prevents taxpayers from assigning their income to another person or entity in order to avoid taxes. The IRS typically scrutinizes cases where income is assigned to family members, particularly when the family member is in a lower tax bracket. Therefore, the parent employing her child in the family business is more likely to receive IRS scrutiny under the assignment of income doctrine.

Question 16

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.

Accepted Answer

The substance-over-form doctrine is likely violated here because the IRS would look at the true nature of the transaction, which seems implausible for a 10-year-old to provide consulting services worth $50,000, suggesting the payment might be a way to shift income.

Question 17

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.

Accepted Answer

The answer of Which of the following may limit the...

Question 18

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.

Accepted Answer

The conversion strategy involves converting taxable income or assets into tax-free or tax-deductible income or assets. Investing in tax-exempt municipal bonds is an example of the conversion strategy as the interest income earned on these bonds is typically exempt from federal income tax and sometimes state and local taxes as well. The other options do not involve converting taxable income/assets into tax-free or tax-deductible income/assets.

Question 19

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.

Accepted Answer

The interest from municipal bonds is generally exempt from federal income taxes. To find the equivalent taxable interest rate that would make Bill indifferent between the two bonds, we use the formula: Tax-Exempt Interest Rate = Taxable Interest Rate * (1 - Marginal Tax Rate). Plugging in the numbers: Tax-Exempt Interest Rate = 8% * (1 - 0.32) = 8% * 0.68 = 5.44%. None of the provided choices match this calculation.

Question 20

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.

Accepted Answer

The assignment of income doctrine holds that income must be taxed to the person who earns it. In this situation, the taxpayer cannot assign the income (rental payments) to her son and avoid taxation. This would violate the assignment of income doctrine.

Quiz 3: Tax Planning Strategies and Related Limitations

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?

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

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?

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

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

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

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

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?

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?

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 common income-shifting strategy is to:

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

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

Which of the following may limit the conversion strategy?

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

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 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?