Advanced Taxation Test Questions
Course Introduction
Advanced Taxation explores complex tax principles and regulations affecting individuals, corporations, partnerships, and trusts. The course covers in-depth topics such as corporate reorganizations, international taxation, tax planning for business transactions, tax compliance, anti-avoidance rules, and the interaction between tax law and accounting standards. It emphasizes applying advanced tax concepts to real-world scenarios through case studies and problem-solving exercises, preparing students for professional practice in taxation and advisory roles.
Recommended Textbook
McGraw Hills Taxation of Individuals and Business Entities 7th Edition by Spilker
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2779 Verified Questions
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Page 2
Chapter 1: An Introduction to Tax
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Sample Questions
Q1) If Manny earns an additional $35,000 in taxable income in year 2014, what is his marginal tax rate (rounded) on this income?
A) 22.49%
B) 28.00%
C) 25.91%
D) 25.00%
E) None of these
Answer: C
Q2) Which of the following is true?
A) A regressive tax rate structure imposes an increasing marginal tax rate as the tax base increases
B) Regressive tax structures are the most common tax rate structure
C) An example of a regressive tax is an excise tax
D) In terms of effective tax rates, a sales tax can be viewed as a regressive tax
E) None of these
Answer: D
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Chapter 2: Tax Compliance, the Irs, and Tax Authorities
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Sample Questions
Q1) A taxpayer can avoid a substantial understatement of tax penalty:
A) if the position is frivolous and disclosed on the tax return.
B) if the position has a realistic possibility of being sustained by the IRS or courts.
C) if there is substantial authority to support the position.
D) if the position has a reasonable basis and is not disclosed on the tax return.
E) None of these.
Answer: C
Q2) The "30-day" letter gives the taxpayer the opportunity to request an appeals conference or agree to the proposed IRS adjustment.
A)True
B)False
Answer: True
Q3) The "90-day" letter gives the taxpayer the opportunity to pay the proposed tax adjustment or file a petition in the U.S. District Court to hear the case.
A)True
B)False
Answer: False
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4
Chapter 3: Tax Planning Strategies and Related Limitations
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Sample Questions
Q1) Nontax factors do not play an important role in tax planning.
A)True
B)False
Answer: False
Q2) If tax rates will be higher next year, taxpayers should defer their income to next year regardless of their after-tax rate of return.
A)True
B)False
Answer: False
Q3) Which is not a basic tax planning strategy?
A) income shifting
B) timing
C) conversion
D) arms length transaction
E) None of these
Answer: D
Q4) The rewards of tax avoidance include stiff monetary penalties and imprisonment.
A)True
B)False
Answer: False
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Chapter 4: Individual Income Tax Overview, Exemptions, and Filing Status
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Sample Questions
Q1) In year 1, the Bennetts' 25-year-old daughter, Jane, is a full-time student at an out-of-state university but she plans to return home after the school year ends. In previous years, Jane has never worked and her parents have always been able to claim her as a dependent. In year 1, a kind neighbor offers to pay for all of Jane's educational and living expenses. Which of the following statements is most accurate regarding whether Jane's parents would be allowed to claim an exemption for Jane in year 1 assuming the neighbor pays for all of Jane's support?
A) No, Jane must include her neighbor's gift as income and thus fails the gross income test for a qualifying relative.
B) Yes, because she is a full-time student and does not provide more than half of her own support, Jane is considered her parent's qualifying child.
C) No, Jane is too old to be considered a qualifying child and fails the support test of a qualifying relative.
D) Yes, because she is a student, her absence is considered as "temporary." Consequently she meets the residence test and is a considered a qualifying child of the Bennetts.
Q2) What is the couple's taxable income?
Q3) What is the couple's adjusted gross income?
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Chapter 5: Gross Income and Exclusions
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Sample Questions
Q1) Desai and Lucy divorced this year. Lucy has custody of their child, Andrea, and under the divorce decree Desai pays Lucy $120,000 per year. The payments must be made in cash and will cease if Lucy dies or remarries. The payments drop to $100,000 per year once Andrea reaches the age of 18. How much of the payments should Lucy include in gross income this year?
Q2) Janine's employer loaned her $5,000 this year (interest-free) to buy a used car. If the federal interest rate was 4%, which of the following is correct?
A) Janine recognizes $200 of taxable interest income.
B) Janine's employer recognizes $200 of deductible interest expense.
C) Janine recognizes $200 of imputed compensation income.
D) Janine recognizes $200 of imputed dividend income.
E) None of these.
Q3) A taxpayer who borrows money will include that amount borrowed in their gross income under the all-inclusive definition of income.
A)True
B)False
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Chapter 6: Individual Deductions
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Sample Questions
Q1) This year Darcy made the following charitable contributions: \[\begin{array} { l l r r } { \underline { \text { Donee } } } & \underline { \text { Property } } & \underline { \text { Cost } } & \underline { \text { FMV } } \\
\text { State University } & \text { IBM stock } & \$ 15,000 & \$ 10,500 \\
\text { Salvation Army } & \text { clothes } & 2,500 & 500 \\
\text { State Art Museum } & \text { painting } & 5,000 & 45,000 \\
\text { City Hospital } & \text { cash } & 8,000 & \end{array}\] Determine the maximum amount of charitable deduction for Darcy's contribution of the painting if her AGI is $80,000 this year. You may assume that both the stock and painting have been owned for 10 years.
Q2) Taxpayers generally deduct the lesser of their standard deduction or their itemized deductions.
A)True
B)False
Q3) Bunching itemized deductions is one form of tax evasion.
A)True
B)False
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Page 8
Chapter 7: Individual Income Tax Computation and Tax
Credits
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Sample Questions
Q1) Which of the following statements best describes the deductions independent contractors may claim for valid business expenses?
A) for AGI deductions
B) from AGI deductions not subject to the two percent of AGI floor
C) from AGI deductions subject to a two percent of AGI floor
D) for AGI deductions limited to income from the business activities
Q2) For married couples, the Social Security wage base limitation applies separately to each spouse.
A)True
B)False
Q3) During 2014, Montoya (age 15) received $2,200 from a corporate bond. He also received $600 from a savings account established for him by his parents. Montoya lives with his parents and he is their dependent. What is Montoya's taxable income?
A) $0
B) $2,200
C) $2,800
D) $1,800
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Page 9
Chapter 8: Business Income, Deductions, and Accounting Methods
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Sample Questions
Q1) Which of the following is a true statement about travel that has both business and personal aspects?
A) Transportation costs are always fully deductible.
B) Meals are not deductible for this type of travel.
C) Only half of the cost of meals and transportation is deductible.
D) The cost of lodging, and incidental expenditures is limited to those incurred during the business portion of the travel.
E) None of these
Q2) Manley operates a law practice on the accrual method and calendar year. At the beginning of the year Manley's firm had an allowance for doubtful accounts with a balance of $15,000. At the end of the year, Manley recorded bad debt expense of $23,000 and the balance of doubtful accounts had increased to $18,000. What is Manley's deduction for bad debt expense this year?
A) $23,000
B) $3,000
C) $26,000
D) $5,000
E) $20,000
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Chapter 9: Property Acquisition and Cost Recovery
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Sample Questions
Q1) If tangible personal property is depreciated using the half-year convention and is disposed of during the first quarter of a subsequent year, the taxpayer must use the mid-quarter convention for the year of disposition.
A)True
B)False
Q2) Property expensed under the §179 immediate expensing election is not included in the 40 percent test to determine whether the mid-quarter convention must be used.
A)True
B)False
Q3) Which of the following business assets is not depreciated?
A) Automobile
B) Building
C) Patent
D) Machinery
E) All of these are depreciated
Q4) Tax cost recovery methods include depreciation, amortization, and depletion.
A)True
B)False
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11
Chapter 10: Property Dispositions
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Sample Questions
Q1) Taxpayers can recognize a taxable gain even though an asset's real economic value has declined.
A)True B)False
Q2) Generally, the amount realized is everything of value received in a sale less selling expenses.
A)True B)False
Q3) Residential real property is not like-kind with non-residential real property.
A)True
B)False
Q4) Collins Corporation, of Camden, Maine, wants to exchange its manufacturing equipment for Rockland Company's equipment. Both parties agree that Collins's machinery is worth $200,000 and that Rockland's machinery is worth $175,000. Collins will not enter into the transaction unless it qualifies as a like-kind exchange. If Collins wants to avoid gain, what could the parties do to equalize the value exchanged but still allow the exchange to qualify as a like-kind exchange?
Q5) Explain whether the sale of a machine used in a trade or business that is sold at a loss generates an ordinary or capital loss?
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Chapter 11: Investments
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Sample Questions
Q1) Bob Brain files a single tax return and decides to itemize his deductions. Bob's income for the year consists of $75,000 of salary, $3,000 long-term capital gain, and $1,500 interest income. Bob's expenses for the year consists of $800 investment advice fees, $700 unreimbursed employee business expenses (a miscellaneous itemized deduction), and $250 tax return preparation fees. What is Bob's actual deduction for miscellaneous itemized deductions?
A) Zero; Bob's investment expenses do not exceed two percent of AGI floor.
B) $1,590
C) $1,500
D) $1,750
E) None of these
Q2) Compare and contrast how interest income is reported for the following types of bonds: (a) bond originally issued at a discount, (b) bond originally issued at a premium, (c) bond purchased at a discount in a secondary market (d) bond purchased at a premium in a secondary market.
Q3) Unrecaptured §1250 gain is taxed at the 28 percent preferential capital gains rate.
A)True
B)False
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Page 13
Chapter 12: Compensation
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Sample Questions
Q1) Tasha receives reimbursement from her employer for dependent care expenses for up to $8,000. Tasha applies for and receives reimbursement of $6,000 for her 10 year old son. How much, if any, is includible in her income?
A) $0.
B) $1,000.
C) $3,000.
D) $6,000.
Q2) Tom recently received 2,000 shares of restricted stock from his employer, Independence Corporation, when the share price was $10 per share. Tom's restricted shares vested three years later when the market price was $14. Tom held the shares for a little more than a year and sold them when the market price was $20. What is the amount of Tom's income or loss on the vesting date?
A) $0.
B) $10,000.
C) $20,000.
D) $28,000.
Q3) Annika's employer provides each employee with up to $200 of monthly vouchers for public transportation. What is the amount that Annika must include into income with respect to her benefit in 2014?
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Page 14
Chapter 13: Retirement Savings and Deferred Compensation
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Sample Questions
Q1) Employees who are at least 50 years old at the end of the year are allowed to contribute more to their 401(k) accounts than employees who are not 50 years old by year end.
A)True
B)False
Q2) Riley participates in his employer's 401(k) plan. He turns 69 years of age on February 15, 2014, and he plans on retiring on July 1, 2014. When must Riley receive his first distribution from the plan to avoid minimum distribution penalties?
A) by April 1, 2014
B) by April 1, 2015
C) by April 1, 2016
D) by April 1, 2017
Q3) Scott and his wife Leanne (ages 39 and 37 respectively) earned $50,000 in 2014. Scott was able to contribute $2,400 ($200/month) to his employer sponsored 401(k). What amount of saver's credit can Scott and Leanne claim in 2014?
Q4) Aiko (single, age 29) earned $40,000 in 2014. He was able to contribute $1,800 ($150/month) to his employer sponsored 401(k). What is the total saver's credit that Aiko can claim for 2014?
Page 15
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Chapter 14: Tax Consequences of Home Ownership
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Sample Questions
Q1) Taxpayers using the simplified method for computing home office expenses do not deduct depreciation expense for the home office use.
A)True
B)False
Q2) Which of the following statements regarding personal and/or rental use of a home is false?
A) A day for which a taxpayer rents a home to an unrelated party for less than the property's fair market value is considered to be a personal use day.
B) A day for which a taxpayer rents a home to a relative for full fair market value is considered to be a rental use day.
C) A day for which an unrelated non-owner stays in the home under a vacation exchange arrangement is considered to be a personal use day.
D) A day for which the home is available for rent but is not occupied does not count as a personal use or a rental use day.
Q3) Expenses of a vacation home allocated to rental use are deductible for AGI.
A)True
B)False
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Chapter 15: Entities Overview
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Sample Questions
Q1) Roberto and Reagan are both 25 percent owner/managers for Bright Light Inc. Roberto runs the retail store in Sacramento, CA, and Reagan runs the retail store in San Francisco, CA. Bright Light Inc. generated a $125,000 profit companywide made up of a $75,000 profit from the Sacramento store, a ($25,000) loss from the San Francisco store, and a combined $75,000 profit from the remaining stores. If Bright Light Inc. is an S corporation, how much income will be allocated to Roberto?
A) $31,250
B) $62,500
C) $75,000
D) $125,000
Q2) From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has assets that have declined in value?
A) Partnership
B) S corporation
C) LLC
D) Partnership and S corporation
E) S corporation and LLC
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Chapter 16: Corporate Operations
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Sample Questions
Q1) Over what time period do corporations amortize purchased goodwill for tax purposes?
A) 180 months
B) 150 months
C) 60 months
D) None of these
Q2) Studios reported a net capital loss of $30,000 in year 5. It reported net capital gains of $14,000 in year 4 and $27,000 in year 6. What is the amount and nature of the book-tax difference in year 6 related to the net capital carryover?
A) $11,000 unfavorable
B) $11,000 favorable
C) $16,000 unfavorable
D) $16,000 favorable
Q3) The tax rate for the corporate alternative minimum tax is a flat 26%.
A)True
B)False
Q4) Netgate Corporation's gross regular tax liability for 2014 was $95,375. What was its taxable income?
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Chapter 17: Accounting for Income Taxes
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Q1) Which of the following items would likely not be included in the computation of a company's structural effective tax rate?
A) Tax effects of international operations
B) Tax effects of state and local operations
C) Tax effects from the domestic production activities deduction
D) Tax effects from goodwill impairment
Q2) Lynch Company had a net deferred tax asset of $68,000 at the beginning of the year, representing a net taxable temporary difference of $200,000. During the year, Lynch reported pretax book income of $800,000. Included in the computation were favorable temporary differences of $20,000 and unfavorable temporary differences of $50,000. During the year, the company's tax rate decreased from 34% to 30%. Lynch's deferred income tax expense or benefit for the current year would be:
A) Net deferred tax benefit of $9,000
B) Net deferred tax expense of $9,000
C) Net deferred tax benefit of $1,000
D) Net deferred tax expense of $1,000
Q3) ASC 740 governs how a company accounts for all taxes it incurs.
A)True
B)False
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Page 19
Chapter 18: Corporate Taxation: Nonliquidating Distributions
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Sample Questions
Q1) Which of these items is not an adjustment to taxable income or net loss to compute current E&P?
A) Dividends received deduction
B) Tax-exempt income
C) Net capital loss carryforward from the prior year tax return
D) Refund of prior year taxes for an accrual method taxpayer
Q2) Husker Corporation reports current E&P of negative $200,000 in 20X3 and accumulated E&P at the beginning of the year of $300,000. Husker distributed $200,000 to its sole shareholder on December 31, 20X3. The shareholder's tax basis in her stock in Husker is $50,000. How is the distribution treated by the shareholder in 20X3?
A) $200,000 dividend
B) $100,000 dividend, $50,000 tax-free return of basis, and $50,000 capital gain
C) $100,000 dividend and $100,000 tax-free return of basis
D) $0 dividend, $50,000 tax-free return of basis, and $150,000 capital gain
Q3) A stock redemption is always treated as a sale or exchange for tax purposes.
A)True
B)False
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Page 20
Chapter 19: Corporate Formation, Reorganization, and Liquidation
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Sample Questions
Q1) A liquidated corporation always recognizes loss realized in a complete liquidation where none of the shareholders is a corporation.
A)True
B)False
Q2) A taxpayer must receive voting common stock to be eligible for deferral in a section 351 exchange.
A)True
B)False
Q3) Amy transfers property with a tax basis of $900 and a fair market value of $600 to a corporation in exchange for stock with a fair market value of $450 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $150 on the property transferred. What is Amy's tax basis in the stock received in the exchange?
A) $900
B) $750
C) $650
D) $450
Q4) What amount of gain or loss does Gary recognize in the complete liquidation?
Q5) What amount of gain or loss does Mike recognize in the complete liquidation?
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Chapter 20: Forming and Operating Partnerships
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Sample Questions
Q1) A partnership with a C corporation partner must always use the accrual method as its accounting method.
A)True
B)False
Q2) Sarah, Sue, and AS Inc. formed a partnership on May 1, 20X9 called SSAS, LP. Now that the partnership is formed, they must determine its appropriate year-end. Sarah has a 30% profits and capital interest while Sue has a 35% profits and capital interest. Both Sarah and Sue have calendar year-ends. AS Inc. holds the remaining profits and capital interest in the LP, and it has a September 30 year-end. What tax year-end must SSAS, LP use for 20X9 and which test or rule requires this year-end?
A) 9/30, majority interest taxable year
B) 12/31, majority interest taxable year
C) 12/31, principal partners test
D) 12/31, least aggregate deferral test
Q3) Partners adjust their outside basis by adding non-deductible expenses and subtracting any tax-exempt income to avoid being double taxed.
A)True
B)False
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Page 22
Chapter 21: Dispositions of Partnership Interests and Partnership Distributions
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Q1) Kathy is a 25% partner in the KDP Partnership and receives $120,000 cash in complete liquidation of her partnership interest. Kathy's outside basis immediately before the distribution is $160,000. KDP currently has a § 754 election in effect and has no hot assets or liabilities. Which of the following statements is true?
A) KDP will step up the basis of its assets by $40,000 and Kathy will recognize a $40,000 loss on the distribution.
B) KDP will step up the basis of its assets by $40,000 and Kathy will recognize a $40,000 gain on the distribution.
C) KDP will step down the basis of its assets by $40,000 and Kathy will recognize a $40,000 loss on the distribution.
D) KDP will step down the basis of its assets by $40,000 and Kathy will recognize a $40,000 gain on the distribution.
Q2) In an operating distribution, when a partnership distributes property other than money with a basis that exceeds the partner's outside basis, the partner assigns a carryover basis to the distributed assets and recognizes a gain.
A)True B)False
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Page 23
Chapter 22: S Corporations
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Q1) Which of the following statements is correct regarding S corporation estimated taxes?
A) S corporations never pay estimated taxes.
B) S corporations with a federal income tax liability of $500 due to the built-in gains tax or excess net passive income tax must pay estimated taxes.
C) S corporations that owe $5,000 in LIFO recapture tax only must pay estimated taxes.
D) S corporations with a federal income tax liability of $100 due to the excess net passive income tax must pay estimated taxes.
E) None of these.
Q2) Built-in gains recognized fifteen years after a C corporation elects to become an S corporation are subject to the built-in gains tax.
A)True
B)False
Q3) Losses not deductible due to the basis rules are carried over to future years.
A)True
B)False
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24
Chapter 23: State and Local Taxes
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Q1) Mighty Manny, Incorporated manufactures ice scrapers and distributes them across the midwestern United States. Mighty Manny is incorporated and headquartered in Michigan. It has product sales to customers in Illinois, Indiana, Iowa, Michigan, Minnesota, and Wisconsin. It has sales personnel only where discussed. Determine the state in which Mighty Manny does not have sales and use tax nexus given the following scenarios:
A) Mighty Manny is incorporated and headquartered in Michigan. It also has property, employees, sales personnel, and intangibles in Michigan.
B) Mighty Manny has a warehouse in Illinois.
C) Mighty Manny has independent sales representatives in Minnesota. The representatives distribute ice scraper-related items for over a dozen companies.
D) Mighty Manny has two customers in Wisconsin. Mighty Manny receives orders over the phone and ships goods to its customers using FedEx.
Q2) All states employ some combination of sales and use tax, income or franchise tax, or property tax.
A)True
B)False
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Chapter 24: The Us Taxation of Multinational Transactions
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Q1) Which of the following statements best describes the substantial presence test as it applies to determining if a non U.S. citizen is a resident alien for U.S. tax purposes?
A) To be treated as a resident alien, an individual must be physically present in the United States for 183 days in the current year.
B) To be treated as a resident alien, an individual must be physically present in the United States for 183 days in the current year and each of the prior two years.
C) To be treated as a resident alien, an individual must be physically present in the United States for 183 days using a formula that includes the current year and the prior two years.
D) To be treated as a resident alien, an individual must be physically present in the United States for 183 days using a formula that includes the current year and the prior year.
Q2) A U.S. corporation reports its foreign tax credit computation on which tax form?
A) Form 1116
B) Form 1118
C) Form 1120
D) Form 8832
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Chapter 25: Transfer Taxes and Wealth Planning of the Cfa Institute
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Sample Questions
Q1) At her death Serena owned real estate worth $210,000 with her spouse in joint tenancy with the right of survivorship. Serena contributed $50,000 to the original cost of the property and her spouse contributed the remaining $100,000. What amount, if any, is included in Serena's gross estate?
A) $50,000
B) $105,000
C) $80,000
D) zero - this property qualifies for the marital deduction. E) None of these is correct.
Q2) This year Alex's friend, Kimberly, was disabled. Alex paid $25,000 to Kimberly's doctor for medical expenses. In addition, Alex also paid $15,000 to Kimberly so that her son could afford tuition at State University this year. Has Alex made taxable gifts, and if so, in what amounts?
Q3) Andrea transferred $500,000 of stock to a trust, with income to be paid to her niece for 20 years (value $125,000) and the remainder to her nephew (value $375,000). Andrea named a bank as independent trustee but retained the power to determine how much income, if any, will be paid in any particular year. What is the amount of the taxable gift, if any? Explain your answer.
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