Advanced Taxation Final Exam Questions
Course Introduction
Advanced Taxation explores the complex tax issues faced by individuals, corporations, and partnerships, focusing on both federal and state taxation. The course covers corporate tax structures, partnership and S corporation taxation, international tax considerations, tax planning strategies, and recent legislative developments. Emphasis is placed on applying tax law to real-world scenarios, analyzing tax consequences of various business transactions, compliance issues, and ethical considerations in tax practice. Students will develop critical skills in tax research, interpretation of tax statutes and regulations, and preparation of complex returns, preparing them for advanced roles in accounting, finance, and tax consulting.
Recommended Textbook Principles of Taxation for Business and Investment Planning 2013 16th Edition by Sally Jones
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Chapter 1: Taxes and Taxing Jurisdictions
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Q1) How often does Congress amend the Internal Revenue Code?
A) Rarely (the Internal Revenue Code has not been amended since 1986)
B) Occasionally (perhaps once every decade)
C) Regularly (at least once every five years)
D) Constantly (at least once a year)
Answer: D
Q2) Taxes on personal property are more difficult to administer and enforce than taxes on real property.
A)True
B)False
Answer: True
Q3) Which of the following characterizes a good tax base?
A) The base can be easily expressed in monetary terms.
B) Taxpayers cannot easily avoid or conceal the base.
C) Taxpayers cannot easily move the base from one jurisdiction to another.
D) All of the above characterize a good tax base.
Answer: D
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Chapter 2: Policy Standards for a Good Tax
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Q1) Which of the following statements concerning income tax rate structures is false?
A) Under a progressive rate structure, the marginal rate and the average rate are equal.
B) Under a regressive rate structure, the average rate for low-income individuals is more than the average rate for high-income individuals.
C) Under either a regressive, proportionate, or progressive rate structure, high-income taxpayers pay more dollars of tax than low-income individuals.
D) In theory, a progressive rate structure results in equal economic sacrifice across taxpayers.
Answer: A
Q2) The city of Belleview operated at an $865,000 surplus this year. The surplus suggests that the municipal tax system is:
A) Fair
B) Efficient
C) Sufficient
D) Convenient
Answer: C
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Chapter 3: Taxes As Transaction Costs
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Q1) Mr. Wills invested in a business that will generate $75,000 annual after-tax cash flow in years 0 and 1 and $90,000 annual after-tax cash flow in years 2 and 3. Compute the NPV of these cash flows at a 10% discount rate.
A) $259,185
B) $277,348
C) $290,310
D) None of the above
Answer: D
Q2) The tax cost of a transaction depends on the taxpayer's average tax rate for the year.
A)True
B)False
Answer: False
Q3) A dollar available today is always worth more than a dollar not available until a future period.
A)True
B)False
Answer: True
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Chapter 4: Maxims of Income Tax Planning
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Q1) In 20Y1, Ms. Graves transferred appreciated property to KL Partnership in exchange for an ownership interest in the partnership. She deliberated waited until 20Y3 before taking cash out of the partnership. Ms. Graves may have been trying to prevent the IRS from applying the:
A) Business purpose doctrine
B) Economic substance doctrine
C) Substance over form doctrine
D) Step transaction doctrine
Q2) Mrs. Day structures a transaction to convert income from ordinary income to capital gain. This tax planning strategy may be taking advantage of the:
A) Entity variable
B) Time period variable
C) Jurisdiction variable
D) Character variable
Q3) A planning strategy that defers a tax cost without deferring the receipt of before-tax cash flows decreases the NPV of the transaction.
A)True
B)False
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Chapter 5: Tax Research
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Q1) Private letter rulings are authoritative only for the specific taxpayer to whom they are issued and cannot be relied on as authority by any other taxpayer.
A)True
B)False
Q2) Tax research may occur as part of tax compliance or tax planning.
A)True
B)False
Q3) The final step in the tax research process is to document and communicate research conclusions.
A)True
B)False
Q4) Which of the following is not a commercial tax service?
A) RIA Federal Tax Coordinator 2d
B) CCH Federal Tax Services
C) Tax Management Portfolios
D) Cumulative Bulletin
Q5) Tax services are typically organized either topically or by Code section.
A)True
B)False
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Chapter 6: Taxable Income From Business Operations
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Q1) PPQ Inc. wants to change from a hybrid method of accounting to the accrual method of accounting for tax purposes. PPQ can't make this change without receiving permission from the IRS.
A)True
B)False
Q2) Randall Company uses the calendar year and the cash method of accounting. On December 31, 2012, Randall made the following cash payments. To what extent can Randall deduct the payments in 2012?
a. $50,000 for a two-year warehouse lease beginning on March 1, 2013.
b. $95,000 of inventory items held for sale to customers.
c. $1,800 to purchase a new refrigerator for the employees' lounge. The refrigerator was delivered on February 1, 2013.
d. $5,000 compensation to a consultant who spent two weeks in January 2013 analyzing Randall's payroll system.
e. $22,000 property tax to the local government for the first six months of 2013.
Q3) Federal and state political lobbying expenses are nondeductible.
A)True
B)False
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Q1) L&P Inc., which manufactures electrical components, purchased new equipment for use in its manufacturing process. The MACRS depreciation on the equipment must be capitalized to the cost of inventory under the unicap rules.
A)True
B)False
Q2) Mr. and Mrs. Carleton founded Carleton Industries in 1993. This year, an independent appraiser placed a $25 million value on Carleton's business; $5 million of the value was attributable to unrecorded goodwill. Which of the following statements is true?
A) Mr. and Mrs. Carleton are allowed to amortize the $5 million value of their business goodwill over 15 years.
B) Mr. and Mrs. Carleton have a zero tax basis in their business goodwill.
C) Mr. and Mrs. Carleton cannot amortize the $5 million value of their business goodwill because it is an intangible asset with an indeterminable life.
D) None of the above is true.
Q3) The MACRS calculation ignores any salvage or residual value of an asset.
A)True
B)False
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Page 9
Chapter 8: Property Dispositions
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Q1) The characterization of income as ordinary or capital gain has no relevance for financial reporting purposes.
A)True
B)False
Q2) Mr. Quick sold marketable securities with a $112,900 tax basis to his 100% owned corporation for $95,000 cash. Which of the following statements is true?
A) If Mr. Quick can offer evidence that the FMV of the securities is $95,000, he can recognize his $17,900 realized loss.
B) If Mr. Quick and his corporation negotiated the terms of the sale at arm's length, Mr. Quick can recognize his $17,900 realized loss.
C) The corporation's tax basis in the securities is $112,900.
D) None of the above is true.
Q3) The installment sale method of accounting applies to which of the following?
A) $89,300 gain realized on sale of business inventory.
B) $798,600 gain realized on sale of common stock in a publicly held corporation.
C) $(41,500) loss realized on sale of land used in a trade or business.
D) None of the above
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Chapter 9: Nontaxable Exchanges
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Q1) Rydell Company exchanged business equipment (initial cost $55,250; accumulated depreciation $25,450) for like-kind equipment worth $44,000 and $2,000 cash. As a result, Rydell must recognize:
A) $2,000 ordinary gain
B) $2,000 Section 1231 gain
C) No gain or loss
D) None of the above
Q2) Loonis Inc. and Rhea Company formed LooNR Inc. by transferring business assets in exchange for 1,000 shares of LooNR common stock. Loonis transferred assets with a $820,000 FMV and a $444,000 adjusted tax basis and received 820 shares. Rhea transferred assets with a $180,000 FMV and a $75,000 adjusted tax basis and received 180 shares. Which of the following statements is true?
A) The FMV of Rhea's 180 shares is $180,000.
B) Rhea's exchange of assets for stock is taxable because Rhea is not in control of LooNR immediately after the exchange.
C) LooNR recognizes a $105,000 gain on the exchange of its stock for Rhea's assets.
D) None of the above is true.
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Chapter 10: Sole Proprietorships, Partnerships, Llcs, and S
Corporations
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Q1) Randolph Scott operates a business as a sole proprietorship. This year his net profit was $10,570. For tax purposes this amount should be reported on:
A) Schedule C, Statement of Profit or Loss from Business
B) The first page of Form 1040 as other income
C) A separate tax return prepared for the business operation
D) Schedule E, Statement of Rent and Royalty Income
Q2) The earnings of a C corporation are taxed only at the shareholder level.
A)True
B)False
Q3) The allocations made to a partner are reported on Schedule K-1 and are referred to as his or her distributive share of partnership items.
A)True
B)False
Q4) John's share of partnership loss was $60,000. He had only enough tax basis to deduct $34,000 of the loss. He may deduct the remaining loss against other income in the following year, regardless of what happens in the partnership.
A)True
B)False
Page 12
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Chapter 11: The Corporate Taxpayer
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Q1) Gosling, Inc., a calendar year, accrual basis corporation, reported $756,000 net income after tax on its 2011 financial statements prepared in accordance with GAAP. The corporation's financial records reveal the following information:
· Gosling earned $478,000 from a qualified domestic production activity.
· Gosling earned $3,500 on an investment in tax-exempt municipal bonds.
· Gosling's depreciation expense per books was $72,000, and its MACRS depreciation deduction was $105,000.
· Gosling recorded $58,000 of business meals and entertainment expense for book purposes.
· Gosling's federal income tax expense per books was $440,000.
a. Compute Gosling's taxable income and regular tax liability.
b. Prepare a Schedule M-1, page 5, Form 1120, reconciling Gosling's book and taxable income.
Q2) For a consolidated group of corporations, Schedule M-3 reconciles worldwide financial statement net income to the financial statement net income of those corporations permitted to be included in the U.S. consolidated tax return group.
A)True
B)False
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Page 13
Chapter 12: The Choice of Business Entity
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Q1) Kyrsten Haas expects her S corporation to generate a profit of $200,000. What is the effective tax rate on the $200,000 if no cash is distributed? Kyrsten's marginal tax rate on ordinary income is 35%.
A) 38.6%
B) 60.8%
C) 41.03%
D) 35%
Q2) Which of the following is not exclusively a benefit of a passthrough entity?
A) Avoiding double taxation.
B) Ability to diffuse ownership.
C) Deductibility of start up losses.
D) All of the above are exclusive benefits of a passthrough entity.
Q3) A family partnership can be used to shift a portion of the income from a capital-intensive manufacturing business to a taxpayer's young children.
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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Q1) Albany, Inc. does business in states C and D. State C apportions income using an equally-weighted three-factor formula; state D uses an apportionment formula that double-weights the sales factor. Albany's before tax income is $3,000,000, and its sales, payroll, and property factors are as follows.
A) State C, $1,100,000; State D, $1,800,000
B) State C, $1,100,000; State D, $1,900,000
C) State C, $1,200,000; State D, $1,800,000
D) State C, $1,300,000; State D, $1,700,001
Q2) Cross-crediting allows multinational corporations to use excess credits generated in low- tax jurisdictions to offset excess limitations generated in high-tax jurisdictions.
A)True
B)False
Q3) The United States has jurisdiction to tax income earned by any foreign corporation that is a controlled subsidiary of a U.S. parent corporation.
A)True
B)False
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Chapter 14: The Individual Tax Formula
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Q1) An individual who files his own tax return but is claimed as a dependent on another individual's return is not allowed any standard deduction or personal exemption.
A)True B)False
Q2) Only natural and adopted children or stepchildren can be a qualifying child for tax purposes.
A)True B)False
Q3) An above-the-line deduction reduces both adjusted gross income and taxable income.
A)True
B)False
Q4) A husband and wife are allowed only one exemption on a jointly filed return. A)True
B)False
Q5) Alice Grim, a single taxpayer, has $219,000 taxable income, which includes a $20,000 capital gain taxed at 15%. Her alternative minimum taxable income in excess of her exemption amount is $237,400. Compute Alice's regular tax, AMT, and total tax.
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Chapter 15: Compensation and Retirement Planning
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Q1) Stock options are a form of compensation that requires a substantial cash outlay by the corporate employer.
A)True
B)False
Q2) Lansing Corporation, a publicly held company with a 35% marginal tax rate, paid its CEO an annual salary of $2.3 million. Ignoring payroll taxes, calculate the after-tax cost of this payment.
A) $2.3 million
B) $1.495 million
C) $1.95 million
D) $0
Q3) The 10% penalty imposed on premature withdrawals from qualified retirement plans is intended to discourage participants from withdrawing funds before retirement.
A)True
B)False
Q4) Reimbursed employment-related business expenses have no net effect on the employee's taxable income.
A)True B)False
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Chapter 16: Investment and Personal Financial Planning
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Q1) Ms. Lopez paid $7,260 interest on a mortgage on undeveloped land that she holds as an investment. Ms. Lopez's AGI is $112,200, which includes $4,900 interest income from a certificate of deposit. Which of the following statements is true?
A) Ms. Lopez can't deduct any of the $7,260 interest expense.
B) Ms. Lopez can deduct $7,260 interest expense as an itemized deduction.
C) Ms. Lopez can deduct $4,900 interest expense as an itemized deduction.
D) Ms. Lopez can deduct $4,900 interest expense as an above-the-line deduction.
Q2) Which of the following statements about the federal gift tax is false?
A) The tax is imposed on the donor.
B) The tax is based on the fair market value of the gifted property.
C) An individual can give away $5 million every year without being subject to tax.
D) The donor's basis in the gifted property carries over to become the donee's basis.
Q3) Two years ago, James loaned $60,000 to his friend. The debt is now uncollectible. If the loan created a bona fide debt, James recognizes a short-term capital loss.
A)True
B)False
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Chapter 17: Tax Consequences of Personal Activities
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Q1) Three years ago, Suzanne bought a new personal automobile for $26,900. This year, she sold it for $19,000. What is the amount and character of Suzanne's gain or loss?
A) No gain or loss recognized on the sale of a personal asset.
B) $19,000 long-term capital gain.
C) $7,900 ordinary loss.
D) $7,900 long-term capital loss.
Q2) Recipients of the Nobel Peace Prize must include the prize in gross income.
A)True
B)False
Q3) Mr. Rex had his car stolen this year. The car had $35,600 basis and a $22,000 FMV. Rex received a $16,500 reimbursement from his insurance company. Compute Rex's casualty loss resulting from the theft.
A) $5,400
B) $5,500
C) $19,000
D) $22,000
Q4) Unemployment benefits are excluded from gross income.
A)True
B)False
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Chapter 18: The Tax Compliance Process
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Q1) Mr. and Mrs. Chung filed their unextended 2011 Form 1040 on May 30, 2012, and had no reasonable cause for the delinquency. The return showed a $10,479 balance of tax due.
Compute the Chungs' late-filing and late-payment penalty.
A) $524
B) $1,048
C) $2,620
D) None of the above
Q2) Corporations are allowed to deduct interest paid on an income tax deficiency as a business expense.
A)True
B)False
Q3) A taxpayer who is disputing a deficiency of $50,000 or less may request an informal hearing by the Small Tax Case Division of the Tax Court.
A)True
B)False
Q4) The statute of limitations for a tax return does not begin to run until the return is filed.
A)True
B)False
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