Question 1

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.

Accepted Answer

The answer of If tax rates are decreasing:
A)taxpayers should accelerate...

Question 2

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 3

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.

Accepted Answer

When tax rates are decreasing, taxpayers should defer income to take advantage of lower tax rates in the future.

Question 4

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.

Accepted Answer

The taxpayer's tax rate last year is not necessary for determining the best timing strategy because it is a historical rate and does not affect the tax planning decisions for the current or future years. The taxpayer's after-tax rate of return, current and future tax rates are essential factors to consider while determining the ideal timing strategy. The taxpayer's tax rate last year is not relevant to the timing strategy as it pertains to past tax years. The other options are all important factors to consider when determining the best timing strategy for tax purposes.

Question 5

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

Delaying billing until after year-end is an example of the timing strategy, as it can affect the timing of when revenue is recognized and when taxes on that revenue must be paid. The other options are not related to timing strategies. By delaying billing until after year-end, the business can defer the recognition of revenue and the associated taxes to the next fiscal year. This is an example of the timing strategy. The other choices are not related to timing strategy.

Question 6

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 doctrines listed limit the income-shifting strategy, as they are all used by the IRS to combat abusive tax avoidance techniques. However, certain legal and ethical considerations may limit the use of income-shifting strategies.

Question 7

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 states that income must be taxed to the person who earns it, rather than being assigned to someone else in an attempt to save on taxes. In this case, employing a child in a family business could be seen as an attempt to assign income to a family member with a lower tax rate. The other choices (paying a dividend, gifting stock, delaying billing) do not necessarily involve an assignment of income and are less likely to receive IRS scrutiny. The assignment of income doctrine states that income must be taxed to the person who earns it. In option B, the parent employing her child in the family business may be seen as an attempt to shift income to a lower tax bracket and receive tax benefits. This is more likely to receive IRS scrutiny compared to the other options.

Question 8

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 transforming income from a taxable source to a tax-exempt source. Investing in tax exempt municipal bonds is an example of this strategy. A dividend payment (A) and salary payment (B) both generate taxable income. Delaying billing customers until after year end (D) may shift the timing of income, but does not change the taxability of the income. The conversion strategy involves converting taxable income into tax exempt income or defer taxable income to a later year to minimize tax liability. Investing in tax exempt municipal bonds is an example of conversion strategy as the interest income earned from these bonds is exempt from federal taxes, and sometimes state and local taxes as well.

Question 9

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.

Accepted Answer

The answer of If tax rates are increasing:
A)taxpayers should accelerate...

Question 10

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 oneself a salary allows for the income to be shifted from the corporation to the owner, potentially resulting in a lower tax rate for the owner. Paying the owner a salary rather than a dividend can shift income from the corporation to the owner, who may be in a lower tax bracket or have more deductions to offset the income.

Question 11

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 specifies that income should be assigned to the person who earns it rather than the person who receives it. In this scenario, the son is merely collecting the rent on behalf of the taxpayer, who is the actual owner of the property and thus earns the rental income. By instructing her son to report the rental income on his tax return, the taxpayer is violating the assignment of income doctrine. The assignment of income doctrine states that a taxpayer cannot avoid paying taxes on income by assigning it to someone else. In this case, the taxpayer is instructing her son to collect rent and report it on his tax return, which is an attempt to assign the income to her son and avoid paying taxes on it herself. This violates the assignment of income doctrine. The constructive receipt doctrine applies when a taxpayer has the right to receive income but chooses not to, and therefore cannot defer taxation on that income. The implicit tax doctrine and step-transaction doctrine are not relevant to this situation.

Question 12

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 could argue that the payment to the 10-year-old daughter for consulting does not reflect the economic reality of the transaction and is instead a means to shift income and reduce the taxpayer's tax liability. This doctrine allows the IRS to reclassify transactions based on their substance rather than their form.

Question 13

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 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 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

Timing strategy refers to the timeline or year in which a taxpayer chooses to recognize income or expenses. In this case, paying all outstanding bills by year-end is an example of timing strategy as the taxpayer is choosing to recognize the expense in the current year to maximize their deductions. The other options are not examples of timing strategy. A cash-basis taxpayer paying all outstanding bills by year-end is an example of the timing strategy because it involves the timing of when expenses are paid in order to maximize deductions in the current tax year.

Question 16

Assume that Bill's marginal tax rate is 17 percent. If corporate bonds pay 5 percent interest, what interest rate would a municipal bond have to offer for Bill to be indifferent between the two bonds? (Do not round your final answer.)
A)17.00 percent
B)5)75 percent
C)5)00 percent
D)4)00 percent
E)None of the choices are correct.

Accepted Answer

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

Question 17

Assume that John's marginal tax rate is 17 percent. If a city of Austin bond pays 6.6 percent interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds?
A)18.70 percent
B)7)95 percent
C)6)60 percent
D)5)48 percent
E)None of the choices are correct.

Accepted Answer

To find the required interest rate for the corporate bond, we need to consider the after-tax return on both bonds. 
For the city of Austin bond, the after-tax return would be:
6.6% x (1-0.17) = 5.47%
For John to be indifferent between the two bonds, the corporate bond must offer the same after-tax return of 5.47%. Thus, we can set up the equation: 
Before-tax corporate bond rate x (1-0.17) = 5.47%
Simplifying, we get:
Before-tax corporate bond rate = 6.59%
Therefore, the corporate bond would need to offer an interest rate of 6.59% for John to be indifferent between the two bonds. Choice B is the closest option.

Question 18

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

To find the equivalent interest rate of a municipal bond that would make Bill indifferent, we use the formula for the after-tax return of the corporate bond and set it equal to the return of the municipal bond (since municipal bond interest is generally exempt from federal taxes). The formula for the after-tax return of the corporate bond is: Corporate Bond Interest Rate * (1 - Marginal Tax Rate). Plugging in the numbers: 8% * (1 - 0.32) = 5.44%. Therefore, a municipal bond would need to offer a 5.44% interest rate for Bill to be indifferent. Since this option is not listed, the correct choice is E) None of the choices are correct.

Question 19

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

To implement the income-shifting strategy, taxpayers with varying tax rates are needed. This is because income-shifting involves moving income from a taxpayer with a higher tax rate to a taxpayer with a lower tax rate, in order to minimize overall tax liability. The income-shifting strategy involves shifting income from a taxpayer in a higher tax bracket to a taxpayer in a lower tax bracket. Therefore, having taxpayers with varying tax rates is necessary for this strategy to work.

Question 20

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, 2019, and has his daughter, Julie, pick up his check on January 2, 2020. Who reports the income and when?
A)Julie in 2020
B)Julie in 2019
C)Jason in 2019
D)Jason in 2020
E)None of the choices are correct.

Accepted Answer

Since Jason is a cash-basis taxpayer, he reports income when he actually receives the payment. Even though he did not physically receive the bonus on December 31, it was still constructively received because it was made available to him. Therefore, he must report the income in 2019, even though his daughter picked up the check on January 2, 2020. Julie does not have to report the income because she did not earn it.

Quiz 3: Tax Planning Strategies and Related Limitations

If tax rates are decreasing:

Which of the following may limit the conversion strategy?

If tax rates are decreasing:

Which of the following is not required to determine the best timing 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 more likely to receive IRS scrutiny under the assignment of income doctrine?

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

If tax rates are increasing:

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

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

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 common income-shifting strategy is to:

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

Assume that Bill's marginal tax rate is 17 percent. If corporate bonds pay 5 percent interest, what interest rate would a municipal bond have to offer for Bill to be indifferent between the two bonds? (Do not round your final answer.)

Assume that John's marginal tax rate is 17 percent. If a city of Austin bond pays 6.6 percent interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds?

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?

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