1. 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. Affords the practitioner the greatest possible degree of control over the prescribed
transactions and the tax consequences.
d. All of the above.
2. Which of the following tax law rules create incentives for tax planning?
a. The Federal income tax itself is deductible in determining taxable income.
b. Reducing the amount of income taxes that are 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 the above.
3. 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).
4. 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 the above.
5. 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. A property tax.
6. A proportional tax rate system represents:
a. an increasing tax rate structure.
b. a flat tax rate structure.
c. the U.S. federal income tax system.
d. none of the above.
7. 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 tax base.
c. best reflects the capacity of the taxpayer to pay.
d. decreases as the tax base grows larger.
8. 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.
9. 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 the above.
10. Most sales and property taxes in the U.S. employ a:
a. proportional rate structure.
b. regressive rate structure.
c. progressive rate structure.
d. consumption rate structure.
11. Social Security Taxes are considered:
a. progressive.
b. flat.
c. regressive.
d. proportional.
12. 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. marginal tax rate.
b. effective tax rate.
c. before-tax cost.
d. None of the above.
13. 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.
14. Tax planning:
a. is a completely legal means for saving taxes.
b. has as its goal tax evasion.
c. endeavors to understate the taxpayer’s real wealth.
d. is all of the above.
15. 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.
16. 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
17. 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.
18. 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 the above.
19. 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. Only (a) and (b).
20. Often, by moving assets or income out of one government authority into another, tax reductions can be effected.
This process is called:
a. changing the timing of recognition of income.
b. changinge the timing of recognition of deductions.
c. deferring the payment of tax.
d. changing tax jurisdictions.
21. 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
22. 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 the above.
23. For 2013, the amount of exemption that a child can enjoy on any interest, dividends or capital gains income is limited
to:
a. $1,000.
b. $1,900.
c. $10,000.
d. There is no exemption for this type of income.
24. 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 the above are judicial doctrines that limit effective tax planning.
25. Taxpayers are rewarded more for finding ways to save taxes than for earning an equal amount in the marketplace.
a. True
b. False
26. Under a proportional tax rate system, the tax rate is constant.
a. True
b. False
27. Any business-related expenses that are incurred in connection with the determination of a tax are not deductible.
a. True
b. False
28. With respect to tax planning activities, the decision maker must compare the after-tax benefits with the pre-tax
costs.
a. True
b. False
29. The effective average tax rate can be found by dividing the total tax liability by the economic income.
a. True
b. False
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.
a. True
b. False
31. Spreading income among related taxpayers is one of the goals of tax planning behavior.
a. True
b. False
32. When tax rates are constant, delaying income recognition or accelerating deductions can be beneficial.
a. True
b. False
33. Taxpayers can use the step-transaction doctrine to obtain various tax advantages.
a. True
b. False
34. The first requirement for effective tax planning is awareness on the part of decision- makers.
a. True
b. False
35. The judicial doctrine ‘business purpose’ can decrease the taxpayer’s ability to employ effective planning techniques.
a. True
b. False
36. 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.
a. True
b. False
37. With regard to employers, generally, salary payments to employees are deductible but fringe benefit payments are
not.
a. True
b. False
38. The ‘Kiddie tax’ was created to prevent parents from sheltering income by putting accounts in the names of their
lower-taxed children.
a. True
b. False
39. Investment expenses can offset ordinary income.
a. True
b. False
40. The progressive nature of the tax system tends to increase the advantage of income splitting.
a. True
b. False
41. Taxpayers can always minimize their tax liability simply by moving income and assets out of one jurisdiction to
another.
a. True
b. False
42. 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 his conclusion?
43. What is a statutory tax trap? Give an example.
44. 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 receiving an equivalent raise in his salary? Why or why not?
45. Identify the five goals of tax planning behavior and give an example of each.
46. 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?
47. 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.