Question 1

The C Corporation Model is a variation of the
A)Current Model.
B)Pension Model.
C)Exempt Model.
D)Deferred Model.

Accepted Answer

The answer of The C Corporation Model is a variation...

Question 2

An individual is planning to establish a new corporation and is weighing the choice between the C corporation form and the S corporation form.She expects the corporation to be profitable each year,with all profits reinvested except to the extent needed to pay corporate taxes or shareholder taxes on profits.The shareholder's plan is to sell the business after six years for a substantial gain.Factors to consider in modelling the entity choice include all of the following except
A)the individual's ordinary income and capital gains tax rates.
B)the shareholder's eligibility for the qualified business income deduction.
C)the availability of the Sec.1202 exclusion.
D)all of the factors must be considered in the modelling.

Accepted Answer

All of the factors listed are relevant and should be considered when deciding between a C corporation and an S corporation, especially given the plan to reinvest profits and sell the business for a gain.

Question 3

If a fully-taxable bond yields a BTROR of 10% (R_b = 10%)and a tax-exempt bond of similar risk earns a BTROR of 7.5% (R_f = 7.5%),then the implicit tax rate is A)25%. B)75%. C)10%. D)none of the above.

Accepted Answer

The implicit tax rate is calculated as (R_b - R_f) / R_b = (10% - 7.5%) / 10% = 25%.

Question 4

The Pass-Through Model used for S corporations and partnerships is an application of the
A)Pension Model.
B)Current Model.
C)Deferred Model.
D)Exempt Model.

Accepted Answer

The Pass-Through Model used for S corporations and partnerships is an application of the Current Model. In the Current Model, the income and losses of the business are passed through to the individual owners and reported on their personal tax returns.

Question 5

Pass-through entities include all of the following types of entities except
A)partnerships.
B)C corporations.
C)S corporations.
D)limited liability companies (LLCs).

Accepted Answer

Pass-through entities are those where the profits or losses pass through to the owners or shareholders and are reported on their individual tax returns. Partnerships, S corporations, and LLCs are all pass-through entities, but C corporations are not.

Question 6

A taxpayer has a traditional IRA and is considering converting it to a Roth.Which of the following factors does not bias the decision towards the Roth conversion?
A)A high tax rate expected for the future withdrawal year compared to the tax rate in the conversion year.
B)The ability to use funds outside the IRA to pay the conversion tax.
C)A high ratio of IRA basis to IRA value.
D)All of the above factors favor the Roth conversion.

Accepted Answer

The answer of A taxpayer has a traditional IRA and...

Question 7

In a progressive tax system,an investor can benefit from tax-exempt bonds when
A)the investor's marginal tax rate is equal to that of the marginal investor.
B)the investor's marginal tax rate exceeds that of the marginal investor.
C)the investor's marginal tax rate is less than that of the marginal investor.
D)none of the above.

Accepted Answer

In a progressive tax system, tax-exempt bonds are more beneficial to investors with higher marginal tax rates because the tax savings from the exemption are greater for them compared to those with lower marginal tax rates.

Question 8

If a fully-taxable bond yields a BTROR of 8% (R_b = 8%)and a tax-exempt bond of similar risk earns a BTROR of 5% (R_f = 5%),then the implicit tax is A)3%. B)5%. C)8%. D)none of the above.

Accepted Answer

The implicit tax is the difference between the BTROR of the fully-taxable bond and the BTROR of the tax-exempt bond, which is (8%-5%) = 3%. This is because the tax-exempt bond earns a lower rate of return due to the tax advantage, and the difference between the two rates represents the tax benefit. Therefore, the correct answer is A) 3%.

Question 9

Given a choice between a fully-taxable investment and a tax-favored investment,investors will prefer the tax-favored investment,assuming the two investments are equally risky.

Accepted Answer

This is because a tax-favored investment offers certain tax benefits that can help increase the investor's after-tax return, making it more attractive than a fully-taxable investment that does not offer such benefits.

Question 10

While tax-exempt bonds are not subject to income tax under the Internal Revenue Code,they are subject to implicit taxes caused by increased demand driving up the price.

Accepted Answer

Tax-exempt bonds may experience implicit taxes in the form of increased demand and higher prices, even though they are not subject to income tax.

Question 11

The difference between the BTRORs of fully-taxable and tax-favored investments is called
A)an explicit tax.
B)an implicit tax.
C)an effective tax.
D)a marginal tax.

Accepted Answer

The difference between the BTRORs of fully-taxable and tax-favored investments is called an implicit tax. This represents the tax cost of investing in a taxable investment instead of a tax-favored investment.

Question 12

Which of the following statements regarding implicit taxes and clienteles is not true?
A)Market forces drive down the BTROR of tax-favored assets.
B)The reduced return of tax-favored assets is an implicit tax.
C)Investors whose tax rate exceeds that of the marginal investor can reap some benefit through the clientele effect.
D)Marginal investors will always benefit from the implicit tax on tax-favored investments.

Accepted Answer

The statement "Marginal investors will always benefit from the implicit tax on tax-favored investments" is not true. While some investors whose tax rate exceeds that of the marginal investor can benefit from the implicit tax through the clientele effect, marginal investors may not benefit if the reduced return on tax-favored assets is significant enough to outweigh any tax savings. Ultimately, the impact of implicit taxes and clienteles on investment decisions will depend on individual investor preferences and tax circumstances.

Quiz 34: Taxes and Investment Planning

The C Corporation Model is a variation of the

If a fully-taxable bond yields a BTROR of 10% (R_b = 10%) and a tax-exempt bond of similar risk earns a BTROR of 7.5% (R_f = 7.5%) ,then the implicit tax rate is

The Pass-Through Model used for S corporations and partnerships is an application of the

Pass-through entities include all of the following types of entities except

A taxpayer has a traditional IRA and is considering converting it to a Roth.Which of the following factors does not bias the decision towards the Roth conversion?

In a progressive tax system,an investor can benefit from tax-exempt bonds when

If a fully-taxable bond yields a BTROR of 8% (R_b = 8%) and a tax-exempt bond of similar risk earns a BTROR of 5% (R_f = 5%) ,then the implicit tax is

Given a choice between a fully-taxable investment and a tax-favored investment,investors will prefer the tax-favored investment,assuming the two investments are equally risky.

While tax-exempt bonds are not subject to income tax under the Internal Revenue Code,they are subject to implicit taxes caused by increased demand driving up the price.

The difference between the BTRORs of fully-taxable and tax-favored investments is called

Which of the following statements regarding implicit taxes and clienteles is not true?

Quiz 34: Taxes and Investment Planning

The C Corporation Model is a variation of the

If a fully-taxable bond yields a BTROR of 10% (Rb = 10%) and a tax-exempt bond of similar risk earns a BTROR of 7.5% (Rf = 7.5%) ,then the implicit tax rate is

The Pass-Through Model used for S corporations and partnerships is an application of the

Pass-through entities include all of the following types of entities except

A taxpayer has a traditional IRA and is considering converting it to a Roth.Which of the following factors does not bias the decision towards the Roth conversion?

In a progressive tax system,an investor can benefit from tax-exempt bonds when

If a fully-taxable bond yields a BTROR of 8% (Rb = 8%) and a tax-exempt bond of similar risk earns a BTROR of 5% (Rf = 5%) ,then the implicit tax is

Given a choice between a fully-taxable investment and a tax-favored investment,investors will prefer the tax-favored investment,assuming the two investments are equally risky.

While tax-exempt bonds are not subject to income tax under the Internal Revenue Code,they are subject to implicit taxes caused by increased demand driving up the price.

The difference between the BTRORs of fully-taxable and tax-favored investments is called

Which of the following statements regarding implicit taxes and clienteles is not true?

If a fully-taxable bond yields a BTROR of 10% (R_b = 10%) and a tax-exempt bond of similar risk earns a BTROR of 7.5% (R_f = 7.5%) ,then the implicit tax rate is

If a fully-taxable bond yields a BTROR of 8% (R_b = 8%) and a tax-exempt bond of similar risk earns a BTROR of 5% (R_f = 5%) ,then the implicit tax is