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MIDTERM-FALL-2005

MIDTERM-FALL-2005 - MIDTERM FALL 2005 Student You must use...

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Unformatted text preview: MIDTERM FALL 2005 Student: You must use a scantron. For T/F, true is A and false is B. If the question requires an essay answer, you must skip that answer on your scantron. You may use a calculator and pencil but no other aids. Use the foilowing to answer questions that are based on the following tax system: _mu $50.ooo $7,500 Eus 25% of the amount over _—_ 1. Refer to the tax rate schedule above. Century Company's taxable income for the current year is $90,000. Its highest marginal tax rate is A) 15% B) 35% C) 20% D) 25% E) 28% True False 2. A regressive tax rate schedule has only one bracket. True False 3. An individual and a corporation each have a million dollars of taxable income. The two taxable entities will have the same tax costs associated with earning an additional $5,000 of taxable income. True False 4. Payment of a tax entitles the payer to a specific good or service. True False 5. A static forecast assumes that the tax base may decrease if the tax rate is increased. True False Page 1 10. II. .The United States does not have the jurisdiction to levy taxes on US. citizens who live in foreign countries. True False . A taxpayer with a 39% marginal tax rate will have larger tax savings from an additional deductible expenditure than a taxpayer with a 34% marginal tax rate. True False . A taxpayer with a 15% marginal tax rate wiil have a smaller tax cost from an additional $1,000 of taxable income than a taxpayer with a 34% marginal tax rate. True False . Under a progressive tax rate structure, average tax rate and the marginal tax rate will be the same if taxable income exceeds the amount taxed at the lowest rate. True False Ramsey did not extend or file his 2005 federal tax return until November ll, 2005. His total tax liability was $3,000; the return showed a not refund due of $575. He filed late because he was tied up with his wedding and honeymoon. What amount of late~filing penalty will he owe for the 2005 tax year? A. $1,050 B. s 150 C. so D. $750 Sometimes a taxpayer chooses to accept a reduced market rate of return in order to take advantage of a tax preference. This is referred to as 301) A. implicit tint. B. explicit tax. C. excise tax. D. constant tax. Page 2 12. 13. 14. 15. When Harvey passed away, the government received $55,000 in taxes that are best described as A. income taxes. B. excise taxes. C. sales taxes. D. transfer taxes. E. ad valorem taxes. Louise faces a constant marginal tax rate of 35% and can choose between the following taxable income streams: Engagement 1 Engagement 2 Engagement 3 Year 0 $ -0- $ 250,000 S 750,000 Year 1 S -0~ $ 250,000 S -0- Year 2 $750,000 $ 250,000 S -0- She uses a 6% discount rate. All other things being equal, Louise should prefer A. Engagement 1 B. Engagement 2 C. Engagement 3 Ernie filed a return for 2005 on April 21, 2006. If the IRS can establish that there was a substantial omission of gross income (not fraudulent), when will the statute of limitations expire for the 2005 return? A. April 15,2012 B. April 21, 2009 C. April 15, 2009 D. August 15, 2009 E. April 21, 2012 The structuring of transactions to reduce tax costs or increase tax savings in order to maximize the net present value of the transaction is referred to as A. tax planning. B. tax avoidance. C. tax evasion. Page 3 16. Bill faces a constant marginal tax rate of 35% on ordinary income, 15% on capital gains, and 0% on income from state bonds. He can choose between the foilowing investments: Investment 1 investment 2 Investment 3 Tax Rate 35% 15% 0% Year 0 $ 500,000 3 ~0— S -0- Year 1 $ -0- S 500,000 S -0- Year 2 $ -0- S -0- S 500,000 Bill uses a 12% discount rate. All other things being equal, he should prefer A. Investmentl B. Investment2 C. Investrnent3 17. As marginai tax rates increase, the after~tax return on a New York City bond will A. increase. B. decrease. C. stay the same. 18. Which of the following is generally considered an indication that Joe has committed tax fraud? A. Joe made minor bookkeeping errors. 13. Joe's business records and documents were destroyed in a flood. C. Joe cannot account for large cash deposits to his bank account. D. Joe empioyed a CPA to prepare his tax return. E. All of the above are generally considered to be indications of fraud. 19. A taxpayer took his case to the U.S. Tax Court and lost. Which of the following describes his appeal options? A. He has none and must pay the proposed tax deficiency. B. He may only appeai his case to the one specific U.S. Circuit Court of Appeals that is appropriate for his geographic location. C. He may appeai his case directly to the U.S. Supreme Court. D. He may appeal his case to any one of the thirteen U.S. Circuit Courts of Appeals. ?age 4 20. A tax plan that involves a willful attempt to defraud the US. government is referred to as A. tax planning. B. tax avoidance. C. tax evasion. 21. As marginal tax rates decrease, the after-tax cost of paying for tax deductible items will A. increase. B. decrease. C. stay the same. 22. Kate's normal discount rate is 10%. Tax Adviser has suggested taking a tax deduction for an item whose correct tax treatment is unclear under current law. Which of the following discount rates should Kate consider using in evaluating the NPV of this transaction? A. 10% B. 8% C. 12% 23. An English citizen (a non-resident for US. tax purposes) who invests in a US. corporation is engaging in tax pianning that uses the A. entity variable. 13. time period variable. C. jurisdiction variable. D. character variable. E. none of the above. 24. Mac faces a constant marginal tax rate of 35% on ordinary income, 15% on capital gains, and 0% on income from state bonds. Taxpayer can choose between the foilowing investments: Investment 1 Investment 2 Investment 3 Tax Rate 35% 15% 0% Year 0 $ 325,000 $-0- $ -0- Year 1 S -0- $ 300,000 $ -0- Year 2 $ -0- $—0- S 285,000 Mac uses an 8% discount rate. All other things being equal, he should prefer A. Investment } B. Investrnent2 C. Investment 3 Page 5 25. 26. 27. 28. 29. A market in which the IRS feels that it is easy to customize the terms of an exchange is referred to as a A. private market. B. public market. C. related party market. A taxpayer who invests in Richmond school bonds, despite the fact that they carry a lower interest rate than corporate bonds, is engaging in tax planning that uses the A. entity variable. B. time period variable. C. jurisdiction variable. D. character variable. Which of the following statements is true? A. A taxpayer will be charged a penalty for the late payment of taxes even if an extension to file was granted. B. The interest charged on the late payment of taxes is deductible on the federal tax return. C. The rate of interest earned on an overpayment of taxes is the same as the rate charged for underpayments. D. A taxpayer that can establish a "reasonable cause" for the late filing of her tax return will be charged a late filing penalty. When real estate taxes increase by $500 on rental property, the monthly rent is increased by $10. The incidence of this increase in property taxes is borne by A. the owner. B. the renter. C. both parties. A taxpayer is subject to a 30% tax rate and incurs a fully deductible expense of $5,000. The tax savings associated with the expense is A. S 5,000. B. 35 1,500. C. $ 3,500. Page 6 30. The Tax Reform Act of 1997 included an exclusion of gain from the sale of personal residences sold after two years of occupancy. The law itself was unclear as to what would happen if a home were sold before it had been occupied at least two years. Taxpayers who sold houses before this issue was clarified faced A. marginal tax rate uncertainty. B. tax law uncertainty. C. audit risk. 31. A taxpayer who decides to hold a capital asset for more than 12 months is engaging in tax planning that uses the A. entity variable. 8. character variable. C. jurisdiction variable. 32. A taxpayer is subject to a 25% tax rate and incurs a non-deductible expense of $5,000. The after tax cost associated with the expense is: A. s 5,000. B. $1,250. c. $ 3,750. 33. The text discusses three sources of uncertainty of tax consequences. Describe each in full. 34. What are the three basic sources of authority for tax law? Page 7 "rte": ans“ art’s .2: "Ia/t3 Mle : if x7e»; :2 (its: MIDTERM FALL 2005 Key ass-Law‘s 3; (My a. .2: if}... m l ”3%: You must use a scantron. For T/F, true is A and false is B. If the question requires an essay answer, you w must skip that answer on your scantron. You may use a calculator and pencil but no other aids. 1. Refer to the tax rate schedule above. Century Company's taxable income for the current year is $90,000. Its highest marginal tax rate is A) 15% B) 35% C) 20% D 25% E 28% m 2. A regressive tax rate schedule has only one bracket. FALSE 3. An individual and a corporation each have a million dollars of taxable income. The two taxable entities will have the same tax costs associated with earning an additional $5,000 of taxable income. FALSE Corporations have a lower marginal tax rate at taxable income of $1 ,000,000. 4. Payment of a tax entitles the payer to a specific good or service. FALSE 5. A static forecast assumes that the tax base may decrease if the tax rate is increased. FALSE 6. The United States does not have the jurisdiction to levy taxes on U.S. citizens who live in foreign countries. FALSE Page 1 7‘ 8. 9. 10. 11. A taxpayer with a 39% marginal tax rate will have larger tax savings from an additional deductible expenditure than a taxpayer with a 34% marginal tax rate. TRUE A taxpayer with a 15% marginal tax rate will have a smaller tax cost from an additional $1,000 of taxable income than a taxpayer with a 34% marginal tax rate. TRUE Under a progressive tax rate structure, average tax rate and the marginal tax rate will be the same if taxable income exceeds the amount taxed at the lowest rate. FALSE Ramsey did not extend or file his 2005 federal tax return until November 11, 2005. His total tax liability was $3,000; the return showed a net refund due of $575. He filed late because he was tied up with his wedding and honeymoon. What amount of late—filing penalty will he owe for the 2005 tax year? a. $1,050 b. $ 150 C. $0 d. $750 No penalty unless balance due upon filing. Sometimes a taxpayer chooses to accept a reduced market rate of return in order to take advantage of a tax preference. This is referred to as a(n) A_ implicit tax. b. explicit tax. c. excise tax. d. constant tax. Definition used in text. Page 2 12. 13. 14. When Harvey passed away, the government received $55,000 in taxes that are best described as a. income taxes. b. excise taxes. 1:. sales taxes. D_ transfer taxes. e. ad valorem taxes. Transfer taxes are based on the value of an individual's wealth transferred by gift or at death. Louise faces a constant marginal tax rate of 35% and can choose between the following taxable income streams: Engagement 1 Engagement 2 Engagement 3 Year 0 S -0- $ 250,000 3 750,000 Year 1 S -0- $ 250,000 $ ~0« Year 2 $750,000 $ 250,000 S -0- She uses a 6% discount rate. All other things being equal, Louise should prefer a. Engagement} b. EngagementZ C_ Engagement 3 When tax costs are neutral, faster payments of income yield a higher NPV. Ernie filed a return for 2005 on April 21, 2006. If the IRS can establish that there was a substantial omission of gross income (not fraudulent), when will the statute of limitations expire for the 2005 return? a. April 15,2012 b. April21,2009 0. April 15, 2009 cl. August 15, 2009 E. AprilZl, 2012 Page 3 15. The structuring of transactions to reduce tax costs or increase tax savings in order to maximize the net present value of the transaction is referred to as A. tax planning. 1:. tax avoidance. c. tax evasion. 16. Bill faces a constant marginal tax rate of 35% on ordinary income, 15% on capital gains, and 0% on income from state bonds. He can choose between the following investments: Investment 1 Investment 2 Investment 3 Tax Rate 35% 15% 0% Year 0 $ 500,000 53 ~O~ $ '0 Year 1 $ -0- $ 500,000 $-0- Year 2 $ “0— S -0- $ 500,000 Bill uses a 12% discount rate. All other things being equal, he should prefer A. Investment 1 b. Investment 2 c. Investment 3 Different tax treatments across transactions can affect NPV of cash flows. 1?. As marginal tax rates increase, the after-tax return on a New York City bond will a. increase. b. decrease. C. stay the same. 18. Which of the following is generally considered an indication that Joe has committed tax fraud? a. Joe made minor bookkeeping errors. b. Joe‘s business records and documents were destroyed in a flood. C. Joe cannot account for large cash deposits to his bank account. (1. Joe employed a CPA to prepare his tax return. e. All of the above are generally considered to be indications of fraud. Page 4 19. A taxpayer took his case to the U.S. Tax Court and test. Which of the following describes his appeal options? a. He has none and must pay the proposed tax deficiency. B_ He may oniy appeal his case to the one specific US. Circuit Court of Appeais that is appropriate for his geographic location. c. He may appeal his case directiy to the US Supreme Court. d. He may appeal his case to any one of the thirteen US. Circuit Courts of Appeals. 20. A tax plan that involves a willful attempt to defraud the U.S. government is referred to as a. tax planning. b. tax avoidance. C. tax evasion. 21. As marginal tax rates decrease, the after-tax cost of paying for tax deductible items will A. increase. b. decrease. c. stay the same. 22. Kate's normal discount rate is 10%. Tax Adviser has suggested taking a tax deduction for an item whose correct tax treatment is unclear under current law. Which of the following discount rates should Kate consider using in evaluating the NPV of this transaction? a. i0% b. 8% C. 12% A higher discount rate reflects a higher degree of risk. 23. An English citizen (a non-resident for US. tax purposes) who invests in a US. corporation is engaging in tax pianning that uses the a. entity variable. b. time period variable. C_ jurisdiction variable. d. character variable. e. none of the above. Page 5 24. Mac faces a constant marginal tax rate of 35% on ordinary income, 15% on capital gains, and 0% on 25. 26. 27. income from state bonds. Taxpayer can choose between the following investments: Investment 1 Investment 2 Investment 3 Tax Rate 3 5% 15% 0% Year 0 $ 325,000 $—0- S ~0— Year I S --O- $ 300,000 $ -0- Year 2 S ~0- $-0- $ 285,000 Mac uses an 8% discount rate. All other things being equal, he should prefer a. Investment] b. lnvestmentZ C. Investment3 Different tax treatments across transactions can affect NPV of cash flows. A market in which the IRS feels that it is easy to customize the terms of an exchange is referred to as a A. private market. b. public market. c. related party market. A taxpayer who invests in Richmond school bonds, despite the fact that they carry a lower interest rate than corporate bonds, is engaging in tax planning that uses the a. entity variabie. b. time period variable. c. jurisdiction variable. D_ character variable. Which of the following statements is true? A_ A taxpayer will be charged a penalty for the late payment of taxes even if an extension to file was granted. b. The interest charged on the late payment of taxes is deductible on the federal tax return. 0. The rate of interest earned on an overpayment of taxes is the same as the rate charged for underpayments. d. A taxpayer that can establish a "reasonable cause" for the late fiiing of her tax return will be charged a iate filing penalty. Page 6 28. 29. 30. 31. 32. When real estate taxes increase by $500 on rental property, the monthly rent is increased by $10. The incidence of this increase in property taxes is borne by a. the owner. b. the renter. C. both parties. Both parties are worse off after the tax increase. A taxpayer is subject to a 30% tax rate and incurs a fuily deductible expense of $5,000. The tax savings associated with the expense is a. 3 5,000. B. $1,500. C. S 3,500. The Tax Reform Act of 1997 included an exclusion of gain from the sale of personal residences sold after two years of occupancy. The law itself was unclear as to what would happen if a home were sold before it had been occupied at least two years. Taxpayers who sold houses before this issue was clarified faced a. marginal tax rate uncertainty. B_ tax law uncertainty. 0. audit risk. A taxpayer who decides to hold a capital asset for more than 12 months is engaging in tax planning that uses the a. entity variable. 3_ character variable. c. jurisdiction variable. A taxpayer is subject to a 25% tax rate and incurs a nonedeductible expense of $5,000. The after tax cost associated with the expense is: A. $ 5,000. b. $ 1,250. c. $ 3,750. Page 7 33. 34. The text discusses three sources of uncertainty of tax consequences. Describe each in fiill. The three types of uncertainty are marginal tax rate uncertainty which can occur when unanticipated changes in MTR cause projections to differ from actual; audit risk which is defined as the potential that the IRS will disallow the tax treatment used in tax projections; and tax law uncertainty which is the possibility that tax laws used in projections will change during the projection period. Each of these uncertainties can cause tax projections to be either overstated or understated. What are the three basic sources of authority for tax law? The three basic sources of tax law include statutory authority in the form of the U.S. Internal Revenue Code of 1986; administrative authority which primarily consists of regulations, revenue rulings, and revenue proceedings; and judicial authority from legal decisions handed down by the various courts. Page 8 ...
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