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Exam 3: Tax Planning Strategies and Related Limitations

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Question 31

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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.

F) B) and D)
G) None of the above

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Question 32

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The business purpose,step-transaction,and substance-over-form doctrines may limit the conversion strategy.

A) True
B) False

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Question 33

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Assume that Larry's marginal tax rate is 25%.If corporate bonds pay 10% interest,what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

When considering cash outflows,higher present values are preferred.

If Julius has a 30% tax rate and a 10% after-tax rate of return,a $40,000 tax deduction in two years will save how much tax in today's dollars? Use Exhibit 3.1.(Round present and future value amounts to 3 places)

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

If tax rates are decreasing:

Assume that Jose is indifferent between investing in a corporate bond that pays 10% interest and a stock with no growth potential that pays an 8% dividend yield.Assume that the tax rate on dividends is 15%.What is Jose's marginal tax rate?

In general,tax planners prefer to accelerate deductions.

The income shifting strategy requires taxpayers with varying tax rates.

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?

Which is not a basic tax planning strategy?

Assume that Lucas' marginal tax rate is 30% and his tax rate on dividends is 15%.If a dividend-paying stock (with no growth potential) pays an 8% 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?

The constructive receipt doctrine is more of an issue for cash basis taxpayers.

The time value of money suggests that $1 in one year from now is worth less than $1 today.

Paying dividends to shareholders is one effective way of shifting income from a corporation to its shareholders.

Jason's employer pays year-end bonuses each year on December 31.Jason,a cash basis taxpayer,would prefer to not 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 31,2017 and has his daughter,Julie,pick up his check on January 2,2018.Who reports the income and when?

Sal,a calendar year taxpayer,uses the cash-basis method of accounting for his sole proprietorship.In late December he performed $40,000 of consulting services for a client.Sal typically requires his clients to pay his bills immediately upon receipt.Assume that Sal's marginal tax rate is 30% this year and 35% next year and that he can earn an after-tax rate of return of 12% on his investments.Should Sal send his client the bill in December or January? Use Exhibit 3.1.(Round discount factor(s)to 3 decimal places.)

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

If Julius has a 20% tax rate and a 10% after-tax rate of return,$25,000 of income in three years will cost him how much tax in today's dollars? Use Exhibit 3.1.(Round present and future value amounts to 3 places)