Chapter 03 Tax Planning Strategies and Related Limitations True / False Questions The goal of tax planning is tax minimization True False Nontax factors not play an important role in tax planning True False Virtually every transaction involves the taxpayer and two other parties that have an interest in the tax ramifications of the transaction True False The timing strategy is based on the idea that where income is taxed affects the tax costs of the income True False In general, tax planners prefer to accelerate deductions True False The concept of present value is an important part of the timing strategy True False Assuming an after-tax rate of return of 10%, John should prefer to pay $85 today instead of $100 in one year True False The time value of money suggests that $1 in one year is worth less than $1 today True False The present value concept becomes more important as interest rates increase True False 10 Future value can be computed as Future Value = Present Value/(1 + r) n True False 3-1 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 11 When considering cash inflows, higher present values are preferred True False 12 When considering cash outflows, higher present values are preferred True False 13 Tax savings generated from deductions are considered cash inflows True False 14 In general, tax planners prefer to defer income This is an example of the conversion strategy True False 15 The timing strategy is particularly effective for cash basis taxpayers True False 16 The timing strategy becomes more attractive as tax rates decrease True False 17 The timing strategy becomes more attractive as interest rates (i.e., rates of return) increase True False 18 The timing strategy becomes more attractive if a taxpayer is able to accelerate deductions by two or more years (versus one year) True False 19 One limitation of the timing strategy is the difficulties in accelerating a tax deduction without accelerating the actual cash outflow that generates the tax deduction True False 20 The constructive receipt doctrine is a natural limitation for the conversion strategy True False 21 The constructive receipt doctrine is more of an issue for cash basis taxpayers True False 22 If tax rates will be higher next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return True False 3-2 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 23 If tax rates will be lower next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return True False 24 If tax rates will be higher next year, taxpayers should defer their income to next year regardless of their after-tax rate of return True False 25 The value of a tax deduction is higher for a taxpayer with a lower tax rate True False 26 The income shifting strategy requires taxpayers with varying tax rates True False 27 The assignment of income doctrine is a natural limitation to the timing strategy True False 28 The business purpose, step-transaction, and substance-over-form doctrines may limit the income shifting strategy True False 29 Paying dividends to shareholders is one effective way of shifting income from a corporation to its shareholders True False 30 The conversion strategy capitalizes on the fact that tax rates vary across different activities True False 31 Implicit taxes may reduce the benefits of the conversion strategy True False 32 The business purpose, step transaction, and substance over form doctrines may limit the conversion strategy True False 33 Tax avoidance is a legal activity that forms the basis of the basic tax planning strategies discussed in class True False 34 Tax evasion is a legal activity that forms the basis of the basic tax planning strategies discussed in class True False 3-3 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 35 The rewards of tax avoidance include stiff monetary penalties and imprisonment True False Multiple Choice Questions 36 The goal of tax planning generally is to: A B C D E Minimize IRS scrutiny Maximize after-tax wealth Support the Federal government 37 Effective tax planning does not require consideration of: A B C D E the taxpayer's tax costs of alternative transactions the other party's tax costs of alternative transactions the other party's nontax costs of alternative transactions 38 Which is not a basic tax planning strategy? A B C D E arms length transaction 39 Which of the following strategies is based on the present value of money? A B C D E 3-4 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 40 Assuming a positive interest rate, the present value of money suggests: A B C D E $1 today = $1 in one year $1 today > $1 in one year $1 today < $1 in one year $1 today