Advanced Taxation Exam Bank
Course Introduction
Advanced Taxation delves into complex topics and current issues in taxation, building upon foundational principles to explore the intricacies of corporate, partnership, and international tax systems. Students will analyze tax planning strategies, compliance requirements, and the tax implications of business transactions. The course also covers problem areas such as tax avoidance, transfer pricing, and the taxation of digital and cross-border activities. Emphasis is placed on critical analysis, case law, interpretation of tax legislation, and ethical considerations, preparing learners for both professional practice and further specialization in tax consultancy or advisory roles.
Recommended Textbook Principles of Taxation for Business and Investment Planning 2019 22nd Edition by Sally Jones
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Chapter 1: Taxes and Taxing Jurisdictions
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Sample Questions
Q1) The city of Springvale imposes a net income tax on businesses operating within its jurisdiction. The tax equals 1% of income up to $100,000 and 1.5% of income in excess of $100,000. The Springvale Bar and Grill generated $782,000 net income this year. Compute its city income tax.
A) $10,230
B) $11,230
C) $11,730
D) None of the above
Answer: B
Q2) Which of the following federal taxes is earmarked for a specific purpose?
A) Corporate income tax
B) Employment taxes
C) Unemployment taxes
D) Both employment taxes and unemployment taxes are earmarked taxes. Answer: D
Q3) A user fee entitles the payer to a specific good or service from the government.
A)True
B)False
Answer: True
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Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) Which of the following statements is true?
A) If Mrs Hall's taxable income is $227,000, her average tax rate is 12%.
B) If Mr. Poe's taxable income is $41,200, his marginal tax rate is 8%.
C) If Ms. Kaye's taxable income is $63,800, her marginal tax rate is 8%.
D) None of the choices are correct.
Answer: C
Q2) Mr Coen has $78,000 taxable income. Compute the tax on this income.
A) $4,740
B) $6,240
C) $8,740
D) None of the choices are correct.
Answer: A
Q3) A progressive rate structure and a proportionate rate structure both result in vertical equity across taxpayers.
A)True
B)False
Answer: True
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4
Chapter 3: Taxes as Transaction Costs
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Q1) Mrs Scott received a $12,000 cash payment. If her marginal tax rate is 40%, which of the following statements is true?
A) If only $9,200 of the payment is taxable income, her after-tax cash flow is $9,200.
B) If the payment is not taxable income, her after-tax cash flow is $12,000.
C) If the payment is taxable income, her after-tax cash flow is $4,800.
D) None of the above is true.
Answer: B
Q2) Mr Vail made an offer to purchase a business for sale by Mr Craig. Mr Vail and Mr Craig had never met prior to their negotiation of the terms of the sale. The sale is an example of a/an:
A) Arm's length transaction
B) Private market transaction
C) Public market transaction
D) Both an arm's length transaction and a private market transaction are true.
Answer: D
Q3) Related party transactions occur in a public market.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) A taxpayer who invests in a growth stock rather than a stock that pays an annual dividend is engaging in tax planning based on the:
A) Entity variable
B) Time period variable
C) Jurisdiction variable
D) Character variable
Q2) Which of the following statements about tax avoidance and tax evasion is false?
A) Tax avoidance is legal, while tax evasion is illegal.
B) The difference between avoidance and evasion is clearly defined in the tax law.
C) Tax evasion is a federal felony offence.
D) Taxpayers should not regard tax avoidance as unethical.
Q3) According to the assignment of income doctrine, income must be taxed to the person receiving the cash from an income-generating transaction.
A)True
B)False
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Chapter 5: Tax Research
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Sample Questions
Q1) A taxpayer who loses a case in the U.S. Tax Court may appeal the case directly to the U.S. Supreme Court.
A)True
B)False
Q2) The topical index of a commercial tax service is considered primary authority.
A)True
B)False
Q3) Which of the following statements regarding secondary authorities is true?
A) Most secondary authorities are published by the federal government.
B) Secondary authorities should never be cited as the authority for final research conclusions.
C) Secondary authorities should always cite primary authority to support conclusions about the application of the tax law.
D) None of the above statements is true
Q4) When the Supreme Court denies certiorari, the decision of the appellate court is final.
A)True
B)False
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Chapter 6: Taxable Income from Business Operations
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Sample Questions
Q1) Hitz Company, a calendar year, accrual basis taxpayer, recorded $1,735 accrued interest expense and $1,735 accrued interest payable when it closed its books on December 31. The interest relates to a loan from First State Bank and accrued over the last two months of the year. Which of the following statements is true?
A) Hitz can't deduct the accrued interest expense until the year of payment.
B) Hitz can deduct the accrued interest expense this year only if it pays the interest within eight and one-half months after the close of the year.
C) Hitz can deduct the accrued interest expense this year.
D) Hitz can never deduct the interest expense.
Q2) Jethro Company, an accrual basis taxpayer, had a $10,000 overdue account payable to a major supplier. The supplier agreed to settle the account for $9,000 cash from Jethro. Which of the following statements is true?
A) Jethro recognizes $1,000 income because of the settlement.
B) Jethro recognizes no income because of the settlement.
C) Jethro can deduct the $9,000 payment.
D) Jethro can deduct a $1,000 bad debt expense.
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) The expense of adapting an existing asset to a new or different use must be capitalized to the cost of the asset for tax purposes.
A)True
B)False
Q2) In an inflationary economy, the use of FIFO maximizes the cost of goods sold and minimizes the cost of ending inventory.
A)True
B)False
Q3) Lensa Inc. purchased machinery several years ago for $400,000. This year, book depreciation on the machinery was $40,000, MACRS depreciation was $35,720, and Lensa's marginal tax rate is 21%. Which of the following statements is true?
A) The book/tax difference in depreciation results in a $899 decrease in Lensa's deferred tax liabilities.
B) The book/tax difference in depreciation results in a $899 deferred tax asset.
C) The $4,280 difference between book and tax depreciation is unfavorable.
D) Both the book/tax difference in depreciation results in a $899 decrease in Lensa's deferred tax liabilities and the $4,280 difference between book and tax depreciation is unfavorable are true.
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Chapter 8: Property Dispositions
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Sample Questions
Q1) N&B Inc. sold land worth $385,000. The purchaser paid $80,000 cash and assumed N&B's $305,000 mortgage on the land. N&B's amount realized on sale is $385,000.
A)True
B)False
Q2) Norbett Inc. generated $15,230,000 ordinary taxable income and realized a $238,000 net capital loss on the sale of marketable securities this year. Which of the following statements is false?
A) Norbett's net income per books includes the $238,000 net capital loss.
B) Norbett's taxable income is $15,230,000.
C) The $238,000 net capital loss is a favorable book/tax difference.
D) The $238,000 net capital loss is a temporary book/tax difference.
Q3) Both corporate and individual taxpayers can carry back a net capital loss to the three prior taxable years.
A)True B)False
Q4) The sale of business inventory always generates ordinary income or loss.
A)True B)False
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Page 10
Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) In June, a fire completely destroyed office furniture owned by W&S Inc. W&S's adjusted tax basis in the furniture was $17,040. W&S received a $15,000 reimbursement from its property insurance company, and on August 8, it paid $16,000 to replace the furniture. Compute W&S's recognized gain on loss on the involuntary conversion and its tax basis in the new furniture.
A) No recognized gain or loss; $18,040 basis in the furniture
B) $2,040 recognized loss; $16,000 basis in the furniture
C) No recognized gain or loss; $13,960 basis in the furniture
D) None of the above
Q2) Berly Company transferred an old asset with a $12,300 adjusted tax basis in exchange for a new asset worth $20,000. Which of the following statements is false?
A) The old asset's FMV is $20,000.
B) If the exchange is nontaxable, Berly's tax basis in the new asset is $12,300.
C) If the exchange is taxable, Berly's recognized gain is $7,700.
D) None of the statements is false.
Q3) A taxpayer who realizes a loss on the exchange of like-kind property can elect to recognize the loss.
A)True
B)False
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Page 11
Chapter 10: Sole Proprietorships
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Sample Questions
Q1) A shareholder in an S corporation can include only his or her own loans to the corporation in tax basis.
A)True
B)False
Q2) At the beginning of year 1, Paulina purchased a 25% general partner interest in Gamma Partnership for $25,000. Paulina's partnership Schedule K-1 for year 1 reported that her share of Gamma's debt at year-end was $10,000 and her share of ordinary loss was $5,000. On January 1, year 2, Paulina sold her interest to another partner for $22,000 cash (including relief of liabilities). Compute Paulina's gain or loss on the sale of her partnership interest.
A) $3,000 loss
B) $8,000 loss
C) $2,000 gain
D) $0 gain or loss
Q3) On June 1, Jefferson had a basis in his partnership interest of $75,000. On June 2, he received a cash distribution from the partnership of $28,000. All of the cash distribution is taxable.
A)True
B)False
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Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) Corporate taxable income after December 31, 2017 is taxed at a flat rate of 21%.
A)True B)False
Q2) An affiliated group consists of a parent company that directly owns 80% of at least one subsidiary corporation plus all other subsidiaries that are 80% owned within the group.
A)True B)False
Q3) Which of the following statements regarding Schedule M-1 is true?
A) The corporate dividends-received deduction is reported on Line 8 of Schedule M-1.
B) A corporation incurring nondeductible fines and penalties would report those amounts on line 5 of Schedule M-1.
C) Line 2 of schedule M-1 should reflect the corporation's actual federal income tax liability for the current year.
D) A corporation realizing a current gain on a like-kind exchange that is deferred for tax purposes would not report that gain on Schedule M-1.
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13
Chapter 12: The Choice of Business Entity
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Q1) Because of conflicts of interest, shareholders are usually prohibited by law from serving as corporate officers and executives.
A)True
B)False
Q2) Which of the following is NOT one of the characteristics of a constructive dividend?
A) Payment between a corporation and a shareholder
B) Original payment treated as deductible by the corporation
C) Original payment treated as made to the shareholder in some capacity other than as an owner of the corporation
D) All of the above are common characteristics of constructive dividends.
Q3) Bart owns 100% of an S corporation that had a net operating loss in the current year. If there is sufficient basis in the stock, he will carry this loss back to reduce taxes in a prior S corporation tax year.
A)True
B)False
Q4) Typical family-owned businesses are operated as passthrough entities.
A)True
B)False
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Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) Which of the following statements regarding controlled foreign corporations is true?
A) U.S. shareholders are taxable on any income earned by a controlled foreign corporation.
B) U.S. shareholders are never taxable on income earned by a controlled foreign corporation until such income is distributed to the shareholders.
C) U.S. shareholders of a controlled foreign corporation can increase their basis by the amount of any constructive distributions from the corporation.
D) Controlled foreign corporations are taxable in the United States on their worldwide income.
Q2) If a corporation with a 21% marginal federal income tax rate pays $20,000 state income tax, the after-tax cost of the state tax is $15,800.
A)True
B)False
Q3) All states assessing an income tax use the same formula for apportionment purposes.
A)True
B)False
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Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) The earned income credit offsets the burden of the federal payroll tax on low-income families and encourages individuals to seek employment rather than to depend on welfare.
A)True
B)False
Q2) An above-the-line deduction reduces both adjusted gross income and taxable income.
A)True
B)False
Q3) Which of the following statements regarding a qualifying child is false?
A) The child must have been alive at least 180 days during the tax year.
B) The child must be a U.S. citizen or resident of the United States, Canada, or Mexico.
C) The child must not have provided more than 50% of his or her own financial support during the year.
D) The child must not have filed a joint return with a spouse unless the return was filed only as a refund claim.
Q4) The Section 199A deduction always has the impact of lowering AGI.
A)True
B)False
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Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) In 2018, Amanda earned $70,000 self-employment income. She was allowed a $4,945 above-the line deduction for her SE tax. Compute Amanda's maximum contribution to her profit-sharing Keogh plan.
A) $13,011
B) $12,022
C) $65,055
D) $55,000
Q2) An independent contractor is not entitled to the same fringe benefits as an employee.
A)True
B)False
Q3) Louise, age 51, quit her job and received a $70,000 distribution from her employer-sponsored qualified retirement plan. She immediately contributed $50,000 to a rollover IRA and used the remaining $20,000 to purchase a car. Compute the tax cost of the distribution if Louise has a 32% marginal tax rate on ordinary income.
A) $6,400
B) $8,400
C) $21,000
D) -0-
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Page 17
Chapter 16: Investment and Personal Financial Planning
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Q1) Mr Moyer owns residential rental property. This year, he received $7,000 revenue from the tenants and incurred $14,900 rental expenses. Mr Moyer must include $7,000 in gross income and is allowed only $7,000 of above-the-line deductions for the expenses.
A)True
B)False
Q2) Ruth Darma is a shareholder who is not involved in the day-to-day activities of an S corporation. Her interest in the business is a passive activity.
A)True
B)False
Q3) Mr Quinn recognized a $900 net short-term capital gain and a $1,380 long-term capital gain this year. Which of the following statements is false?
A) If Mr. Quinn's marginal tax rate on ordinary income is 12%, the total income tax on his capital gains is $108.
B) If Mr. Quinn's marginal tax rate on ordinary income is 37%, the total income tax on his capital gains is $609.
C) Only $1,380 of the capital gain is subject to a preferential tax rate.
D) None of the above is false.
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Chapter 17: Tax Consequences of Personal Activities
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Q1) Which of the following statements about the tax consequences of gambling is true?
A) Gambling winnings are not taxable, and gambling losses are not deductible.
B) Gambling losses are an above-the-line deduction.
C) Gambling losses are deductible as itemized deductions only to the extent of gambling winnings.
D) Gambling winnings are taxable, but gambling losses are not deductible.
Q2) Mr and Mrs Trent divorced last year. Pursuant to the divorce, Mr Trent transferred marketable securities (FMV $100,000; basis $67,000) to Mrs Trent. This year, Mrs Trent sold the securities for $112,000. Which of the following statements is true?
A) Mrs Trent recognized a $45,000 gain on sale this year.
B) Mrs Trent recognized $100,000 income last year.
C) Mrs Trent recognized a $12,000 gain on sale this year.
D) Mrs Trent recognized no income last year and no gain on sale this year.
Q3) Mrs Hanson's financial support this year consisted of: $14,650 Social Security benefits, $9,600 pension from her former employer's qualified retirement plan, and $15,000 cash gifts from her children. Compute Mrs Hanson's AGI.
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Chapter 18: The Tax Compliance Process
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Sample Questions
Q1) Dela filed her unextended 2017 Form 1040 on November 2, 2018, and had no reasonable cause for the delinquency. The return showed a $22,840 balance of tax due.
Compute Ms. Dela's late-filing and late-payment penalty.
A) $5,710
B) $7,994
C) $5,938
D) $4,568
Q2) Taxpayers should keep all supporting documentation (credit card statements, etc.) for a tax return for at least three years after the return is filed.
A)True
B)False
Q3) Mr and Mrs Dint filed their 2017 Form 1040 on January 28, 2018. Assuming that the return does not contain any significant errors, what is the latest date that the IRS can assess any additional 2017 tax?
A) December 31, 2020
B) January 28, 2021
C) April 17, 2021
D) December 31, 2021
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