Tax Research and Planning Final Exam Questions
Course Introduction
Tax Research and Planning provides students with the foundational skills necessary to navigate the complexities of tax law and develop effective tax strategies. The course emphasizes the identification, interpretation, and application of tax authorities, including statutes, regulations, rulings, and case law. Students will gain experience with research methods using primary and secondary tax sources, and learn how to communicate their findings through professional tax memoranda. Additionally, the course covers strategies for tax planning and compliance, enabling students to recognize opportunities for advantageous tax positioning while adhering to ethical and legal standards.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 2019 22nd Edition by Sally Jones
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Page 2
Chapter 1: Taxes and Taxing Jurisdictions
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Sample Questions
Q1) A tax on net income is an example of a transaction-based tax.
A)True
B)False
Answer: False
Q2) Which of the following does not characterize federal transfer taxes?
A) The tax is imposed on individuals but not on corporations.
B) The tax is based on the value of property transferred by gift or at death.
C) The tax is a transaction tax.
D) All of the above characterize federal transfer taxes.
Answer: D
Q3) Which of the following statements regarding the political process of creating tax law is false?
A) The political process contributes to the dynamic nature of the tax law.
B) Special interest groups have little effect on the tax legislative process.
C) When taxpayers devise a new tactic for reducing their tax burdens, governments respond by enacting a new rule to render the tactic ineffective.
D) Changes in political philosophy often reflect shifts in the public attitude about the proper role of taxes in society.
Answer: B
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Page 3
Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) Bilex Inc. owns real property valued at $629,800. Compute Bilex's tax on this property.
A) $13,798
B) $7,500
C) $6,298
D) None of the choices are correct.
Answer: D
Q2) Mr Ohno owns and operates a part-time service business that generates $80,000 annual taxable income. His federal tax rate on this income is 17%. Because of recent legislation, this rate will increase to 25% next year.
A. Based on a static forecast, how much additional revenue will the federal government collect from Mr Ohno next year?
B. How much additional revenue will the federal government collect if Mr Ohno decides to work fewer hours and consequently earns only $50,000 next year?
Answer: A. The federal government will collect $6,400 additional revenue ($80,000 × 8% rate increase).
B. $0. The federal government will collect $1,100 less revenue ([$50,000 × 25%] - [$80,000 × 17%]).
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Page 4
Chapter 3: Taxes as Transaction Costs
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Sample Questions
Q1) A taxpayer's marginal tax rate and discount rate are independent variables in the NPV calculation.
A)True
B)False
Answer: True
Q2) Mr and Mrs Rath invested in a business that will generate the following cash flows over a three-year period. Use Appendix A.
If the Raths' marginal tax rate over the three year period is 20% and they use a 6% discount rate, compute the NPV of the transaction.
A) $59,340
B) $55,996
C) $50,413
D) None of the above.
Answer: A
Q3) The tax law prohibits related party transactions.
A)True
B)False
Answer: False
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Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) Mrs Stout has a $35,000 capital gain eligible for a 28% preferential tax rate. Which of the following statements is false?
A) If Mrs Stout's regular marginal tax rate is 22%, she can elect to recharacterize the capital gain as ordinary income.
B) If Mrs Stout's regular marginal tax rate is 24%, the preferential tax rate has no value to her.
C) If Mrs Stout's regular marginal tax rate is 35%, the preferential tax rate saves her $2,450 in tax.
D) None of the above is false.
Q2) Tax avoidance is the reduction of a person's tax liability through illegal means. A)True B)False
Q3) Planning opportunities are created when the tax law applies differentially to alternative business transactions.
A)True
B)False
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6
Chapter 5: Tax Research
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Sample Questions
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) The U.S. Supreme Court:
A) Typically hears hundreds of tax cases each year.
B) May deny certiorari for a tax case because the court believes that the case involves a significant principle of law.
C) May grant certiorari for a tax case because two or more appellate courts have rendered conflicting opinions on the proper resolution of a tax issue.
D) Does not hear cases on tax issues.
Q3) Private letter rulings and technical advice memoranda are primary authority for those taxpayers to whom they were issued.
A)True
B)False
Q4) Tax research may occur as part of tax compliance or tax planning.
A)True
B)False
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Chapter 6: Taxable Income from Business Operations
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Sample Questions
Q1) An unfavorable temporary book/tax difference generates a deferred tax asset.
A)True
B)False
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.
Q3) Which of the following businesses is prohibited from using the cash receipts and disbursement method of accounting for tax purposes?
A) Partnership with two individual partners with $9 million average annual gross receipts
B) Personal service corporation with $8 million average annual gross receipts
C) Corporation with $3 million average annual gross receipts
D) None of the businesses are prohibited from using the cash method
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) Durna Inc., a calendar year taxpayer, made two asset purchases this year. The first purchase was a machine costing $874,000, and the second purchase was equipment costing $660,000. Both assets are 7-year recovery property. Durna placed the machine in service on March 27 and the equipment in service on December 14. How many months of MACRS depreciation is Durna allowed for each asset?
A) Durna is allowed six months depreciation for the machine and 1.5 months of depreciation for the equipment.
B) Durna is allowed 10.5 months depreciation for the machine and 1.5 months of depreciation for the equipment.
C) Durna is allowed 1.5 months of depreciation for both the machine and the equipment. D) Durna is allowed six months of depreciation for both the machine and the equipment.
Q2) Stanley Inc., a calendar year taxpayer, purchased a building and placed it in service on June 12. The MACRS depreciation calculation assumes that the building was placed in service on May 15 (midquarter).
A)True B)False
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Chapter 8: Property Dispositions
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Sample Questions
Q1) Which of the following is a capital asset?
A) Accounts receivable of an accrual basis business
B) Business equipment
C) Self-created goodwill
D) Purchased goodwill
Q2) Gupta Company made the following sales of capital assets this year. What is the effect of the three sales on Gupta's taxable income?
A) $700 increase
B) $12,900 increase
C) No effect
D) None of the choices are correct
Q3) Noble Inc. paid $310,000 for equipment three years ago. This year, it sold the equipment for $200,000. Through date of sale, accumulated book depreciation was $93,840 and accumulated tax depreciation was $147,327. Assuming a 21% tax rate, what is the effect of the sale on Noble's deferred tax accounts?
A) $11,232 increase in deferred tax assets
B) $11,232 increase in deferred tax liabilities
C) $11,232 decrease in deferred tax liabilities
D) No effect on deferred tax accounts
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Page 10
Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) Compute Loonis and Rhea's realized and recognized gain on the exchange.
A) Loonis realized and recognized $376,000 gain. Rhea realized and recognized $105,000 gain.
B) Loonis realized $376,000 gain and recognized no gain. Rhea realized and recognized $105,000 gain.
C) Loonis realized $376,000 gain and recognized no gain. Rhea realized $105,000 gain and recognized no gain.
D) There is not enough information to compute realized and recognized gain.
Q2) Luce Company exchanged investment land for a building to be used in its business. Luce's gain on the exchange was nontaxable (because the assets were like-kind) but was included in financial statement income. Which of the following statements is false?
A) Luce's book basis in the building received is the building's cost (FMV).
B) Luce's tax basis in the building received equals its tax basis in the land surrendered.
C) Luce's future depreciation deductions with respect to its tax basis in the building will be different from future depreciation expense for financial statement purposes.
D) None of the statements is false.
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11
Chapter 10: Sole Proprietorships
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Sample Questions
Q1) Grant and Amy have formed a new business to be operated through an S corporation. They each own 50% of the corporation's outstanding common stock. During the first year of operations, the business incurred an operating loss of $100,000. In allocating this loss to the shareholders:
A) Grant and Amy must each be allocated $50,000 of the operating loss.
B) If the corporate charter permits, the S corporation can make a special allocation of 100% of the operating loss to Grant.
C) Because the shareholders have limited liability for the S corporation's debts, they are not permitted any deduction for the operating loss.
D) The corporation should also consider ownership of any outstanding preferred stock in making the loss allocation.
Q2) A guaranteed payment may be designed to compensate a partner for personal services rendered to the partnership.
A)True
B)False
Q3) Corporations cannot be shareholders in an S corporation.
A)True
B)False
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Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) For a corporate taxpayer in the 21% marginal tax bracket, a $20,000 tax credit is equivalent to a $95,238 tax deduction.
A)True
B)False
Q2) John's, Inc. manufactures and sells fine furniture. What is John's regular tax liability if it had taxable income of $40,000,000 for its fiscal year ended September 30, 2018?
A) $14,000,000
B) $9,800,000
C) $8,400,000
D) $11,200,000
Q3) Corporations are rarely targeted in political debates over taxation.
A)True
B)False
Q4) Corporate taxable income after December 31, 2017 is taxed using a progressive rate schedule with a top marginal rate of 21%.
A)True
B)False
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Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) Glover, Inc. had $350,000 of taxable income, all of which was personal holding company income. The corporation paid a dividend of $350,000 in November. The corporation will owe a personal holding company tax for the year.
A)True
B)False
Q2) Which of the following entities does not provide all the owners with limited liability for debts incurred by the entity?
A) C corporation
B) S corporation
C) Limited partnership
D) LLC
Q3) A business generates profit of $100,000. The owner has a 37% marginal tax rate. What amount of corporate and individual income tax will be paid on this profit if the business is an S corporation and no income is distributed?
A) Corporate tax, $21,000; individual tax, $37,000
B) Corporate tax, $21,000; individual tax, $0
C) Corporate tax, $0; individual tax, $37,000
D) Corporate tax, $21,000; individual tax, $15,800
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Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) Stockholm Imports Inc., a U.S. multinational, received a $500,000 dividend from its foreign subsidiary in 2016. The subsidiary paid $112,000 foreign income tax with respect to this dividend. Stockholm's U.S. tax rate in 2016 was 34%. If Stockholm had no other foreign source income, compute its deemed paid foreign tax credit.
A) $208,080
B) $112,000
C) $58,000
D) $0
Q2) Compute its U.S. income tax liability.
A) $840,000
B) $737,625
C) $567,000
D) $170,625
Q3) Tri-State's income for the current year is $250,000. Approximately how much income will be taxed by Oklahoma?
A) $250,000
B) $218,125
C) $44,375
D) $173,750
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Page 15
Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Adjusted gross income equals total income less itemized deductions.
A)True
B)False
Q2) The standard deduction is not deductible in the computation of alternative minimum taxable income.
A)True
B)False
Q3) Kilo is an unmarried individual. She has $219,344 taxable income in 2018. Compute Ms. Kilo's regular tax liability if she files as a single taxpayer and if she files as a surviving spouse.
A) Single $52,460; surviving spouse $61,924
B) Single $55,990; surviving spouse $42,222
C) Single $43,896; surviving spouse $52,460
D) None of the above
Q4) A taxpayer who knowingly signs a joint return on which his spouse has failed to report her income is liable for any tax assessments made by the IRS on that income.
A)True
B)False
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Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) Retired participants in employer-sponsored qualified retirement plans must begin receiving distributions no later than April 1st of the year following the year in which they reach age 70½.
A)True
B)False
Q2) An employee receives $110,000 of group term life insurance coverage per year. The cost of this coverage to his employer is $90. The cost based on the IRS's uniform premium table is $1.08 per year per $1,000 of coverage. What amount is taxable to the employee?
A) $64.80
B) $54.00
C) $90.00
D) $118.80
Q3) Knox, age 34 and single, has $127,800 AGI, $108,200 of which is compensation income. Compute her maximum contribution to her Roth IRA.
A) $0
B) $2,640
C) $2,860
D) $5,500
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Page 17
Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) Mrs Heyer inherited real estate from her mother. The mother's basis in the real estate was $382,000, and the fair market value at the date of the mother's death was $900,000. The mother's taxable estate was only $2.4 million, so the estate did not owe any federal estate tax. This year, Mrs Heyer sold the real estate for $875,000. Compute her gain or loss recognized on sale.
A) $0
B) $25,000 loss
C) $493,000 gain
D) $875,000 gain
Q2) An individual with a 10% rate marginal tax rate on ordinary income will pay no tax on long-term capital gains.
A)True
B)False
Q3) The tax consequences of a business activity are generally the same as the tax consequences of an investment activity.
A)True
B)False
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18
Chapter 17: Tax Consequences of Personal Activities
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Sample Questions
Q1) Lori owns a vacation home that she rents out for about three months each year. Her deduction for expenses allocable to the rental periods is limited to her gross rental income.
A)True
B)False
Q2) Helen makes quilts and sells them at the regional county fairs. This year, she earned $950 from quilt sales and spent $3,300 on supplies and travel relating to her quilting activity. If the IRS determines that this activity is a hobby instead of a business, Helen can't deduct her $2,350 net loss.
A)True
B)False
Q3) Which of the following government transfer payments is included in the recipient's gross income?
A) Food stamps
B) Need-based welfare payments
C) Unemployment compensation
D) None of the above is included.
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Chapter 18: The Tax Compliance Process
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Sample Questions
Q1) The statute of limitations for a tax return does not begin to run until the return is filed.
A)True
B)False
Q2) Which type of audit takes place at the taxpayer's place of business?
A) Correspondence examination
B) Office examination
C) Field examination
D) All of the above
Q3) Which of the following statements about the tax return filing process is false?
A) Every income tax return filed is checked for mathematical accuracy.
B) Every income tax return that was not prepared by a professional tax service is audited for errors in applying the tax law.
C) The information on a Form 1040 is cross-checked against information returns filed by the taxpayer's employer and other parties that paid income to the taxpayer during the year.
D) None of the above is false.
Q4) Only one spouse must sign a jointly filed Form 1040.
A)True
B)False
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