Tax Research and Practice Exam Bank
Course Introduction
Tax Research and Practice is a course designed to equip students with the skills and knowledge necessary to effectively research and interpret tax laws, regulations, and rulings. The course covers fundamental tax research methodologies, the utilization of primary and secondary tax authorities, and the application of tax research tools and databases. Students will learn to analyze complex tax issues, communicate their findings through professional tax memos and client letters, and apply ethical considerations in tax practice. By engaging in practical research exercises and case studies, students will develop the proficiency needed to address real-world tax problems and support informed tax planning and compliance decisions.
Recommended Textbook Principles of Taxation for Business and Investment Planning 20th Edition by Sally Jones
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Chapter 1: Taxes and Taxing Jurisdictions
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Sample Questions
Q1) Fewer than half of the state governments depend on gambling as a source of revenue.
A)True
B)False
Answer: False
Q2) Which of the following statements concerning judicial authority is false?
A) Appellate court decisions have more authority than trial court decisions.
B) Supreme Court decisions have more authority than appellate court decisions.
C) Supreme Court decisions are the equivalent of law.
D) None of the above statements is false.
Answer: D
Q3) The city of Mayfield charges individuals convicted of DWI (driving while intoxicated)
$500 for the first conviction and $2,000 for any subsequent conviction. These charges are an example of a(n):
A) User's fee
B) Transaction-based tax
C) Activity-based tax
D) Government penalty
Answer: D
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Page 3
Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) Jurisdiction M imposes an individual income tax based on the following schedule.
\[\begin{array} { | c | c | }
\hline \text { Rate } & \text { Income bracket } \\
\hline 5 \% & \$ - 0 - \text { to } \$ 50,000 \\
\hline + 8 \% & \$ 50,001 \text { to } \$ 200,000 \\
\hline + 12 \% & \$ 200,001 \text { ard above } \\
\hline
\end{array}\] Ms. Owen has $314,000 taxable income. Compute the tax on this income.
A) $29,680
B) $28,180
C) $37,680
D) None of the above
Answer: B
Q2) Vertical equity focuses on measurement of the tax base, and horizontal equity focuses on the tax rate structure.
A)True
B)False
Answer: False
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Chapter 3: Taxes As Transaction Costs
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Sample Questions
Q1) When the tax law applies differentially to transaction alternatives, decisions should focus on before-tax earnings.
A)True
B)False
Answer: False
Q2) Ms. Kent has $200,000 in an investment paying 8% annual interest. Her marginal tax rate is 40%. Which of the following statements is false?
A) Ms. Kent's annual before-tax cash flow from this investment is $16,000.
B) If the interest is tax-exempt, Ms. Kent's annual after-tax cash flow is $16,000.
C) If the interest is taxable, Ms. Kent's annual after-tax cash flow is $6,400.
D) None of the above is false.
Answer: C
Q3) The tax savings from a deduction decreases as the taxpayer's marginal tax rate increases.
A)True
B)False
Answer: False
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Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) Mr. Erske plans to pay $100,000 for one of three investment alternatives that have the same risk. The income from investment 1 would be taxed at Mr. Erske's 30% regular tax rate, the income from investment 2 would be taxed at a 15% preferential rate, and the income from investment 3 is tax-exempt. The investments offer the following before-tax yields. Investment 1: 8.5%
Investment 2: 7.5%
Investment 3: 6.0%
Which investment should Mr. Erske select?
A) Investment 1
B) Investment 2
C) Investment 3
D) Mr. Erske is neutral between investment 2 and investment 3.
Q2) Hilex Inc. liquidates its investment in General Electric corporate bonds and reinvests the proceeds in City of Miami municipal bonds. This tax planning strategy may be taking advantage of the:
A) Character variable
B) Entity variable
C) Time period variable
D) Jurisdiction variable
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Page 6
Chapter 5: Tax Research
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Sample Questions
Q1) The final step in the tax research process is to document and communicate research conclusions.
A)True
B)False
Q2) A keyword search in an electronic tax service:
A) Allows the researcher to combine words and phrases to define the search.
B) Is identical to using the topical index in a paper service.
C) Is not an efficient way to conduct tax research.
D) Cannot be restricted to only a part or portion of the data base.
Q3) Revenue procedures are a type of secondary authority.
A)True
B)False
Q4) Which of the following is not a citation to a primary authority?
A)Sec. 1245
B)Lengsfield v. Comm., 50 AFTR 1683 (CA-5, 1957)
C)M-5800 Activities Not Engaged in for Profit - Hobby Losses
D)Rev. Proc. 2002-32, 2002-1 C.B. 959
Q5) Tax research may occur as part of tax compliance or tax planning.
A)True
B)False
Page 7
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Chapter 6: Taxable Income From Business Operations
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Sample Questions
Q1) If an accrual basis taxpayer prepays interest expense, the payment results in an unfavorable temporary book/tax difference.
A)True
B)False
Q2) Accurate measurement of taxable income is the only objective of the federal income tax laws.
A)True B)False
Q3) Welch Inc. has used a fiscal ending September 30 as its taxable year since its incorporation in 1988. The shareholders have decided to shut down Welch's business and dissolve the corporation on March 31. Which of the following statements is false?
A) Welch's final tax return will be a short-period return.
B) Welch's final tax return will include its income from October 1 to March 31.
C) Welch must annualize its taxable income on its final tax return.
D) None of the above is false.
Q4) 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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Sample Questions
Q1) Colby Company performed professional services for M&E Inc. In exchange for the services, M&E gave Colby a 12-month lease on commercial office space. M&E could have charged $4,350 monthly rent for the space on the open market. Compute Colby's tax basis in the lease.
A) The lease is an intangible asset and therefore has a zero basis to Colby.
B) The lease has a zero basis because Colby obtained the lease at no cost.
C) $52,200.
D) None of the above
Q2) Follen Company is a calendar year taxpayer. On September 1, Follen signed a 24-month lease on 3,800 square feet of commercial office space. Follen paid a $2,580 fee to the real estate agent who located the space and negotiated the lease. It also paid $10,925 to rewire the space to conform to its computing and other electrical requirements. The rewiring qualifies as five-year recovery property. Compute Follen's first-year cost recovery deductions relating to the lease space.
Q3) Cosmo Inc. paid $15,000 plus $825 sales tax plus a $200 delivery charge for a new business asset. Cosmo's tax basis in the asset is $15,200, and it can deduct the sales tax.
A)True B)False
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Chapter 8: Property Dispositions
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Sample Questions
Q1) 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.
Q2) Dender Company sold business equipment with a $386,000 initial cost basis and $171,000 accumulated tax depreciation. Compute Dender's recaptured ordinary income and Section 1231 gain or loss recognized if the amount realized on sale was: a. $200,000
b. $300,000
c. $400,000
Q3) The same asset may be an ordinary asset in the hands of one taxpayer and a capital asset in the hands of a different taxpayer.
A)True
B)False
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Page 10
Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) Lorch Company exchanged an old asset with a $120,700 tax basis and a $155,000 FMV for a new asset with a $142,250 FMV and $12,750 cash.
a. If the old asset and the new asset are like-kind properties, compute Lorch's realized and recognized gain and Lorch's tax basis in the new asset.
b. How would your answers change if the new asset is worth only $116,000, and Lorch received $39,000 cash in the exchange?
Q2) Tanner Inc. owns a fleet of passenger automobiles that it would like to dispose of in a nontaxable exchange. Which of the following would qualify as like-kind property?
A) Sports utility vehicles
B) Double decker buses
C) Dump trucks
D) Both a. and b. would qualify as like-kind.
Q3) Mr. Bentley exchanged investment land subject to a $300,000 mortgage for commercial real estate subject to a $188,000 mortgage. Mr. Bentley is treated as paying $112,000 boot in the exchange.
A)True
B)False
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Chapter 10: Sole Proprietorships, Partnerships, Llcs, and S
Corporations
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Sample Questions
Q1) Bernard and Leon formed a partnership on January 1 with cash contributions of $600,000 and $200,000, respectively. The partners agree to share profits and losses in the ratio of their initial capital contributions. The partnership immediately borrowed $800,000. What is Bernard's tax basis in his partnership interest?
A) $1,200,000
B) $600,000
C) $800,000
D) $1,400,000
Q2) Partners receiving guaranteed payments are not required to pay self-employment tax on such payments.
A)True
B)False
Q3) A guaranteed payment may be designed to compensate a partner for personal services rendered to the partnership.
A)True
B)False
Q4) 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 34% marginal tax bracket, a $20,000 tax credit is equivalent to a $58,824 tax deduction.
A)True
B)False
Q2) Aloha, Inc. had the following results for its first two years of operation: \[\begin{array} { l r r } & 2015 & 2016 \\ \text { Regular tax liability } & \$ 230,000 & \$ 331,200 \\ \text { Tentative minimum tax } & \$ 250,000 & \$ 258,000 \end{array}\] Which of the following statements is true?
A) There is no AMT credit carryover from 2015 to 2016.
B) There is an AMT credit carryover from 2015 to 2016.
C) There is an AMT credit carryover from 2016 to 2017.
D) There is an AMT credit carryback from 2016 to 2015.
Q3) The taxable income earned by a personal service corporation is taxed at a flat rate of 35%.
A)True B)False
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Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) Individual shareholders who create a brother-sister controlled group do not derive any federal tax advantage from doing so.
A)True
B)False
Q2) A business generates profit of $100,000. The owner has a 39.6% marginal tax rate. What amount of corporate and individual income tax will be paid on this profit if the business is a regular corporation and no income is distributed?
A) Corporate tax, $22,250; individual tax, $39,600
B) Corporate tax, $22,250; individual tax, $0
C) Corporate tax, $0; individual tax, $39,600
D) Corporate tax, $22,250; individual tax, $15,550
Q3) Andrews Corporation owns all of the outstanding stock of Zeta Inc. The two corporations do not file a consolidated income tax return. This year, each corporation recorded $200,000 of taxable income. What is the regular tax liability of each corporation?
A) $68,000
B) $61,250
C) $122,500
D) $136,000
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Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) The federal income tax deduction allowed for state income taxes paid decreases the cost of the state taxes.
A)True B)False
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) This year, Plateau, Inc.'s before-tax income was $4,765,000. Plateau paid $310,000 income tax to state A and $130,000 income tax to stateB.
Q4) Excess foreign tax credits can only be carried to future tax years.
A)True B)False
Q5) The deemed paid foreign tax credit is available only to U.S. corporations that own 30% or more of the voting stock of a foreign corporation that paid dividends during the taxable year.
A)True B)False
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Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Which of the following statements regarding the calculation of regular tax liability is false?
A) Regardless of filing status, the highest marginal rate for individual taxpayers is 39.6%.
B) The individual tax rate schedules are adjusted annually for inflation.
C) The tax brackets in the married-filing-separately rate schedule are one-half of the brackets in the married-filing-jointly rate schedule.
D) None of the above is false.
Q2) Mr. and Mrs. Borem spent $1,435 for child care for their two dependent children, who are two and four years old. Mr. Borem's earned income was $55,870, Mrs. Borem had no earned income, and the AGI on their joint return was $66,210. Calculate their dependent care credit.
A) $0
B) $287
C) $502
D) $1,435
Q3) Adjusted gross income equals total income less itemized deductions.
A)True
B)False
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Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) Lansing Corporation, a publicly held company with a 35% marginal tax rate, paid its CEO an annual salary of $1 million plus a bonus of $1.3 million. The bonus was based a targeted amount of annual gross revenue. 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
Q2) Self-employed individuals are allowed to deduct the cost of health insurance for themselves and their families only as an itemized deduction.
A)True
B)False
Q3) An employee recognizes taxable income if his employer provides group-term life insurance coverage in excess of $50,000.
A)True
B)False
Q4) Unreimbursed moving expenses are a miscellaneous itemized deduction.
A)True
B)False
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Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) Mr. Forest, a single taxpayer, recognized a $252,000 loss on the sale of Section 1244 stock. What is the character of this loss?
A) $50,000 ordinary and $202,000 capital
B) $100,000 ordinary and $152,000 capital
C) $252,000 capital
D) $252,000 ordinary
Q2) Qualified dividend income earned by an individual taxpayer is taxed at a maximum income tax rate of 20%.
A)True
B)False
Q3) The kiddie tax limits the tax savings from a transfer of income-producing property to a minor child by taxing a portion of such income at the parent's marginal tax rate.
A)True
B)False
Q4) The cash surrender value of a life insurance policy is taxable to the policy beneficiary upon the death of the insured individual.
A)True
B)False
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Chapter 17: Tax Consequences of Personal Activities
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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) Gifts are not included in the recipient's gross income.
A)True
B)False
Q3) Unemployment benefits are excluded from gross income.
A)True
B)False
Q4) Which of the following statements about divorce settlements is false?
A) Alimony is excluded from the recipient's gross income.
B) Child support is excluded from the recipient's gross income.
C) Alimony is an above-the-line deduction for the payer.
D) None of the above is false.
Q5) Mia inherited $1 million from her deceased grandfather. Mia must include the inheritance in gross income.
A)True
B)False
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Chapter 18: The Tax Compliance Process
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Sample Questions
Q1) Who of the following can't represent a taxpayer during an interview with the IRS?
A) An enrolled agent
B) A certified public accountant
C) An attorney
D) All of the above can represent the taxpayer.
Q2) Mr. Boyd is a bookkeeper for a local auto repair company. Several years ago, he began to prepare federal income tax returns for his friends and relatives and has developed this sideline into a profitable business. Which of the following statements is true?
A) Mr. Boyd is considered an income tax return preparer subject to federal penalties because he is compensated for preparing returns.
B) Mr. Boyd is not considered an income tax return preparer because he is not an attorney, CPA, or enrolled agent.
C) Mr. Boyd must sign the tax returns prepared for his clients.
D) Statements A. and C. are true.
Q3) Only one spouse must sign a jointly filed Form 1040.
A)True
B)False
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