Advanced Taxation Solved
Exam Questions
Course Introduction
Advanced Taxation explores complex issues in tax law and practice, building on foundational taxation principles. The course examines topics such as corporate and international taxation, tax planning and avoidance strategies, tax implications of mergers and acquisitions, and specialized areas including trusts, estates, and indirect taxes. Students will analyze current tax legislation and case law, develop skills in tax research, and apply critical thinking to solve real-world tax problems. Emphasis is placed on ethical considerations, compliance requirements, and strategic tax decision-making relevant to individuals and organizations.
Recommended Textbook McGraw Hills Taxation of Individuals and Business Entities 6th Edition by Spilker
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Chapter 1: An Introduction to Tax
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Q1) If Leonardo earned an additional $30,000 of taxable income this year, what would be the marginal tax rate (rounded) on the extra income for year 2014?
A) 27.75%
B) 17.50%
C) 25.00%
D) 28.00%
E) None of these
Answer: D
Q2) The effective tax rate expresses the taxpayer's total tax as a percentage of the taxpayer's taxable and nontaxable income.
A)True
B)False
Answer: True
Q3) The tax base for the federal income tax is taxable income.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Tax Compliance, the Irs, and Tax Authorities
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Q1) Dominic earned $1,500 this year, and his employer withheld $200 of federal income tax from his salary. Assuming that Dominic will have zero tax liability this year, he:
A) is required to file a tax return.
B) is not required to file a tax return but should file a return anyway.
C) is required to file a tax return but should not file because he owes no tax.
D) is not required to file a tax return and should not file a return.
E) None of these.
Answer: B
Q2) Joel claimed a high amount of charitable contributions as a deduction on his tax return relative to taxpayers with similar income levels. The information matching program is the IRS program most likely to identify Joel's tax return for audit.
A)True
B)False
Answer: False
Q3) Temporary Regulations have more authoritative weight than revenue rulings.
A)True
B)False
Answer: True
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4
Chapter 3: Tax Planning Strategies and Related Limitations
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Q1) Assume that Keisha's marginal tax rate is 40% and her tax rate on dividends is 15%. If a city of Atlanta bond pays 7.65% interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Keisha to be indifferent between the two investments?
A) 15%
B) 10%
C) 9%
D) 7.65%
E) None of these
Answer: C
Q2) 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
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Page 5
Chapter 4: Individual Income Tax Overview, Exemptions, and Filing Status
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Q1) William and Charlotte Collins divorced in November of year 1. William moved out and Charlotte remained in their house with their 10-month-old daughter Autumn. Diana, Charlotte's mother, lived in the home and acted as Autumn's nanny for all of year 1. William provided 70% of Autumn's support, Diana provided 20%, and Charlotte provided 10%. When the time came to file their tax returns for year 1, William, Charlotte, and Diana each wanted to claim Autumn as a dependent. Their respective AGIs for year 1 were $50,000, $35,000, and $52,000. Who has priority to claim Autumn as a dependent?
A) William
B) Charlotte
C) Diana
D) They must negotiate amongst themselves.
Q2) Which of the following statements is true:
A) Income character determines the tax year in which the income is taxed.
B) Income character depends on the taxpayer's filing status.
C) Qualified dividend income is taxed at a lower rate than the same amount of ordinary income.
D) A taxpayer selling a capital asset at a gain recognizes ordinary income.
Q3) What is the couple's taxable income?
Q4) What is the couple's adjusted gross income?
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Chapter 5: Gross Income and Exclusions
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Q1) Which of the following is a description of how the annuity exclusion ratio is calculated for an annuity paid over a fixed period?
A) The expected return is divided by the number of payments.
B) The original investment is divided by the prevailing interest rate.
C) The original investment is divided by the number of payments.
D) The expected return is divided by the prevailing interest rate.
E) None of these
Q2) The principle of realization for tax purposes is very different from realization as it is understood for financial reporting purposes.
A)True
B)False
Q3) Community property laws dictate that income earned by one spouse is treated as though it was earned equally by both spouses.
A)True
B)False
Q4) An employee may exclude up to a 40 percent employer-provided discount on services.
A)True
B)False
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Chapter 6: Individual Deductions
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Q1) Self employed taxpayers can deduct the cost of health insurance as long as they do not actually participate in their spouses' employer-provided health plan.
A)True
B)False
Q2) Which of the following is a true statement?
A) Fees for investment advice are included in miscellaneous itemized deductions subject to the 2 percent of AGI limitation.
B) Unreimbursed employee business expenses are included in miscellaneous itemized deductions subject to the 2 percent of AGI limitation.
C) Fees for tax preparation are included in miscellaneous itemized deductions subject to the 2 percent of AGI limitation.
D) Reimbursed employee business expenses are included in miscellaneous itemized deductions subject to the 2 percent of AGI limitation unless the employer's reimbursement plan qualifies as an accountable plan.
E) All of these are true.
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8
Chapter 7: Individual Income Tax Computation and Tax Credits
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Sample Questions
Q1) Depending on the year, the original (unextended) due date for an individual's tax return may be before April 15.
A)True
B)False
Q2) Max is a 14-year-old dependent of his parents. During 2014, Max earned $1,800 working part time jobs and he received $1,500 of interest income from corporate bonds that were given to him last year. What is Max's 2014 taxable income?
Q3) The alternative minimum tax is the AMT base multiplied by the AMT rate. A)True B)False
Q4) Demeter is a single taxpayer. Her AGI in 2014 is $81,200. Demeter may claim a child tax credit for her daughter Persephone. What amount of child tax credit is Demeter entitled to claim after any applicable phase-out?
Q5) The earned income credit is sometimes referred to as a negative income tax. A)True B)False
Q6) All capital gains are taxed at preferential rates.
A)True B)False
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Chapter 8: Business Income, Deductions, and Accounting Methods
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Q1) Don operates a taxi business, and this year one of his taxis was damaged in a traffic accident. The taxi was originally purchased for $32,000 and the adjusted basis was $2,000 at the time of the accident. The taxi was repaired at a cost of $2,500 and insurance reimbursed Don $700 of this cost. What is the amount of Don's casualty loss deduction?
A) $1,300
B) $2,500
C) $1,800
D) $2,000
E) Don is not eligible for a casualty loss deduction.
Q2) Danny owns an electronics outlet in Dallas. This year he paid $600 to register for a four-day course in management in Chicago. Danny paid $800 in airfare and $1,000 for five nights lodging. After the course, Danny spent the last day sightseeing. During the trip, Danny also paid $140 a day for meals, and $80 a day for a rental car. What amount of these travel-related expenditures may Danny deduct as business expenses?
Q3) The all-events test for income determines the period in which income will be recognized for tax purposes.
A)True
B)False
Page 10
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Chapter 9: Property Acquisition and Cost Recovery
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Sample Questions
Q1) Tax cost recovery methods do not include:
A) Amortization
B) Capitalization
C) Depletion
D) Depreciation
E) All of these are tax cost recovery methods
Q2) If a machine (seven-year property) being depreciated using the half-year convention is disposed of during the seventh year, a taxpayer must multiply the appropriate depreciation percentage from the MACRS table percentage by 50 percent to calculate the depreciation expense properly.
A)True
B)False
Q3) If the business use percentage for listed property falls below 50 percent, the only adjustment is all future depreciation must be calculated under the straight-line method.
A)True
B)False
Q4) Goodwill and customer lists are examples of §197 amortizable assets.
A)True
B)False
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Chapter 10: Property Dispositions
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Sample Questions
Q1) Which of the following is not true regarding installment sales?
A) Only gains are eligible for installment sale reporting.
B) Depreciation recapture is deferred in an installment sale.
C) The gross profit percentage is needed to determine the annual gain recognized.
D) Stock sales are ineligible for installment sale treatment.
E) None of these.
Q2) Bateman Corporation sold an office building that it used in its business for $800,000. Bateman bought the building ten years ago for $600,000 and has claimed $200,000 of depreciation expense. What is the amount and character of Bateman's gain or loss?
A) $40,000 ordinary and $360,000 §1231 gain.
B) $200,000 ordinary and $200,000 §1231 gain.
C) $400,000 ordinary gain.
D) $400,000 capital gain.
E) None of these.
Q3) A net §1231 gain becomes ordinary while a net §1231 loss becomes long-term capital gain.
A)True
B)False
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Chapter 11: Investments
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Q1) Investment expenses treated as miscellaneous itemized deductions do not include:
A) expenses incurred to generate tax-exempt income
B) investment interest expense
C) expenses for investment advice
D) expenses incurred to generate tax-exempt income and investment interest expense
E) investment interest expense and expenses for investment advice
Q2) The rental real estate exception favors:
A) lower income taxpayers (AGI less than $80,000)
B) middle income taxpayers (AGI greater than $80,000 and less than $150,000)
C) upper income taxpayers (AGI greater than $150,000)
D) lower income taxpayers (AGI less than $80,000) and middle income taxpayers (AGI greater than $80,000 and less than $150,000)
E) middle income taxpayers (AGI greater than $80,000 and less than $150,000) and upper income taxpayers (AGI greater than $150,000)
Q3) Describe the three main loss limitations that taxpayers must overcome before deducting losses allocated to them from a specific activity.
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Page 13
Chapter 12: Compensation
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Q1) Up to $5,250 of educational benefits can be excluded from an employee's compensation.
A)True
B)False
Q2) Taxable fringe benefits include automobile allowances, gym memberships, and personal use tickets to the theater or sporting events.
A)True
B)False
Q3) Current compensation is usually comprised of salary, wages, and bonuses.
A)True
B)False
Q4) Which of the following is not an example of a nontaxable fringe benefit?
A) Monthly employer provided transit benefit of $100.
B) Group-term life insurance policy providing $100,000 of coverage.
C) Employer provided parking of $100 per month.
D) Qualified employee discounts.
Q5) Leesburg paid its employee $200,000 of compensation for the year. What is the after-tax cost of paying the salary assuming a 30 percent marginal tax rate (ignore payroll taxes)?
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Chapter 13: Retirement Savings and Deferred Compensation
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Q1) In 2014, Tyson (age 22) earned $3,500 from his part-time job and he reported $15,000 of interest income (unearned income). Assuming he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution Tyson can make in 2014?
Q2) On December 1, 2014 Irene turned 71 years old. She is still working for her employer and she participates in her employer's 401(k) plan. Irene is not required to receive a minimum distribution for 2014 from her 401(k) account because she has not yet retired.
A)True
B)False
Q3) Retired taxpayers over 59½ years of age at the end of the year must receive minimum distributions from defined contribution plans or they are subject to a penalty. A)True
B)False
Q4) In 2014, Madison is a single taxpayer who is 25 years of age. During 2014, she contributed $3,000 to her employer sponsored 401(k) account. Her 2014 AGI was $64,500 (before considering IRA deductions). What is the maximum deductible contribution, if any, that Madison can make her to IRA?
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Chapter 14: Tax Consequences of Home Ownership
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Q1) Which of the following best describes a qualified residence for purposes of determining a taxpayer's deductible home mortgage interest expense?
A) Only the taxpayer's principal residence.
B) The taxpayer's principal residence and two other residences (chosen by the taxpayer).
C) The taxpayer's principal residence and one other residence (chosen by the taxpayer).
D) Any two residences chosen by the taxpayer.
Q2) A taxpayer who rents out a home for at least one day and does not use a home for personal purposes for at least 15 days during the year is ineligible to deduct any qualified residence interest expense on a loan secured by the home.
A)True
B)False
Q3) Lebron Taylor purchased a home on July 1, 2013 for $500,000. Lebron paid for the entire purchase price with cash. In July of 2013, Lebron needed additional cash for purposes unrelated to his home so he took out a home equity loan for $150,000. During 2014, he made interest only payments of $4,500 on the loan. What amount of the $4,500 interest expense can Lebron deduct in 2014?
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Page 16
Chapter 15: Entities Overview
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Q1) Roberto and Reagan are both 25 percent owner/managers for Bright Light Enterprises. Roberto runs the retail store in Sacramento, CA, and Reagan runs the retail store in San Francisco, CA. Bright Light 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 is taxed as a partnership and decides that Roberto and Reagan will be allocated 70 percent of his own store's profit with the remaining profits allocated pro rata among all the owners, how much income will be allocated to Reagan?
A) ($25,000)
B) ($17,500)
C) $5,000
D) $20,000
Q2) Nancy purchased a building and then leased the building to ZML. Nancy is the sole shareholder of ZML. She leased the building to ZML for $2,500 per month. However, the IRS determined that the fair market value of the lease payment should only be $1,500 per month. How would the lease payment be treated with respect to both Nancy and ZML?
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17
Chapter 16: Corporate Operations
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Q1) In January 2014, Khors Company issues nonqualified stock options to its CEO, Jenny Svaro. Because the company does not expect Ms. Svaro to leave the company, the options vest at the time they are granted with a total value of $50,000. In December of 2015, the company experiences a surge in its stock price, and Ms. Svaro exercises the options. The total bargain element at the time of exercise is $40,000. For 2015, what is the nature of the book-tax difference due to the options exercised?
A) Favorable and temporary
B) Favorable and permanent
C) Unfavorable and temporary
D) Unfavorable and permanent
E) Not enough information to determine.
Q2) Minimum tax credits generated by the corporate AMT can be carried forward indefinitely.
A)True
B)False
Q3) Corporations are allowed to deduct at least some AMT exemption regardless of profitability.
A)True
B)False
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Page 18
Chapter 17: Accounting for Income Taxes
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Q1) Which of the following statements about ASC 740 as it relates to uncertain tax positions is true?
A) ASC 740 deals with all tax benefits involving income and non-income taxes.
B) ASC 740 deals with whether a recognized income tax benefit will be realized.
C) ASC 740 deals with recognized tax benefits related to income tax positions claimed on a filed tax return.
D) ASC 740 deals with recognized tax benefits related to income tax positions regardless of whether the item is taken on a filed tax return.
Q2) A valuation allowance can reduce both a deferred tax asset and a deferred tax liability.
A)True
B)False
Q3) Tax-exempt interest from municipal bonds is an example of a permanent difference. A)True
B)False
Q4) ASC 740 is the sole source of rules related to accounting for income taxes.
A)True
B)False
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Chapter 18: Corporate Taxation: Nonliquidating Distributions
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Q1) Inca Company reports current E&P of negative $100,000 in 20X3 and accumulated E&P at the beginning of the year of $200,000. Inca distributed $300,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?
A) $0
B) $100,000
C) $200,000
D) $300,000
Q2) Au Sable Corporation reported taxable income of $800,000 in 20X3 and paid federal income taxes of $272,000. Not included in the computation was a disallowed penalty of $25,000, life insurance proceeds of $100,000, and an income tax refund from 20X2 of $50,000. Au Sable is an accrual basis taxpayer. The corporation's current earnings and profits for 20X3 would be:
A) $875,000
B) $653,000
C) $603,000
D) $553,000
Q3) Stock dividends are always tax-free to the recipient.
A)True
B)False
Page 20
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Chapter 19: Corporate Formation, Reorganization, and Liquidation
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Q1) To meet the control test under section 351, a taxpayer transferring property to a corporation must own 80 percent or more of the corporation's voting stock and 80 percent of each class of nonvoting stock after the transfer.
A)True
B)False
Q2) Gain or loss is always recognized when realized for tax purposes.
A)True
B)False
Q3) Which statement best describes the concept of realization as it applies to gain or loss?
A) Realization is the recording of gain or loss on a tax return.
B) Realization is the result of an exchange of property rights in a transaction.
C) Realization is the excess of amount realized over adjusted basis.
D) Realization is the excess of adjusted basis over amount realized.
Q4) Continuity of interest as it relates to a tax reorganization focuses on the aggregate equity received by the shareholders of the target corporation in the transaction.
A)True
B)False
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Q5) What amount of gain or loss does Amelia recognize in the complete liquidation?
Chapter 20: Forming and Operating Partnerships
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Q1) Zinc, LP was formed on August 1, 20X9. When the partnership was formed, Al contributed $10,000 in cash and inventory with a FMV and tax basis of $40,000. In addition, Bill contributed equipment with a FMV of $30,000 and adjusted basis of $25,000 along with accounts receivable with a FMV and tax basis of $20,000. Also, Chad contributed land with a FMV of $50,000 and tax basis of $35,000. Finally, Dave contributed a machine, secured by $35,000 of debt, with a FMV of $15,000 and a tax basis of $10,000. What is the total inside basis of all the assets contributed to Zinc, LP?
A) $140,000
B) $165,000
C) $175,000
D) $200,000
Q2) Which of the following does not represent a tax election available to either partners or partnerships?
A) Electing to change an accounting method
B) Electing to amortize organization costs
C) Electing to expense a portion of syndication costs
D) Electing to immediately expense depreciable property under Section 179
Q3) What general accounting methods may be used by a partnership and how and by whom are they selected?
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Page 22
Chapter 21: Dispositions of Partnership Interests and Partnership Distributions
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Q1) 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
Q2) A partner will recognize a loss from a liquidating distribution when the distribution includes only cash, unrealized receivables, and inventory and the partner's outside basis is less than the sum of the bases of the distributed assets.
A)True
B)False
Q3) In the sale of a partnership interest, a selling partner will recognize ordinary income (rather than capital gain) when the partnership assets include cash and land held for 5 years as an investment.
A)True
B)False
Q4) Hot assets include assets except cash, capital assets and §1231 assets.
A)True
B)False
23
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Chapter 22: S Corporations
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Q1) Vanessa is the sole shareholder of V Corporation. V Corporation was formerly a C corporation but is currently an S corporation. At the end of 2014, before considering distributions, V Corporation's accumulated adjustments account (AAA) balance was $35,000 and its accumulated E&P from its years as a C corporation was $10,000. On July 1, V Corporation distributed $60,000 to Vanessa. What is the amount and character of income Vanessa must recognize on the distribution if her stock basis before considering the distribution was $60,000? What is Vanessa's stock basis after accounting for the distribution?
Q2) Hazel is the sole shareholder of Maple Corp. In 2014 Maple operated as a C corporation and reported $15,000 of taxable income (and earnings and profits). In 2014, Maple elected S corporation status. During 2015 Maple reported $12,000 of ordinary business income and no separately stated items. It also distributed $25,000 to Hazel. What is the amount and character of income Hazel must recognize on the distribution? What is Hazel's stock basis at the end of 2015 (after accounting for the distribution) if her basis at the beginning of the year was $5,000?
Q3) Regarding debt, S corporation shareholders are deemed at risk only for direct loans they make to S corporations.
A)True
B)False
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Page 24
Chapter 23: State and Local Taxes
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Q1) Which of the following is not a general rule for calculating the payroll factor?
A) Includes salaries, commissions, and bonuses.
B) Excludes compensation to independent contractors.
C) Allocates compensation for employees working in more than one state.
D) Assigns the payroll of each employee to a single state.
Q2) In Complete Auto Transit the court determined eight criteria for determining whether a state can tax a nondomiciliary company.
A)True
B)False
Q3) Roxy operates a dress shop in Arlington, Virginia. Lisa, a Maryland resident, comes in for a measurement and purchases a $1,500 dress. Lisa returns to Virginia a few weeks later to pick up the dress and drive it back to her Maryland residence where she will use the property. Assuming that Virginia's sales tax rate is 5 percent and that Maryland's sales tax rate is 6 percent, what is Roxy's sales and use tax liability?
A) $0.
B) $75 to Virginia.
C) $75 sales tax to Virginia and $15 use tax to Maryland.
D) $90 to Maryland.
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Page 25
Chapter 24: The US Taxation of Multinational Transactions
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Q1) Flint Steel Corporation has a precredit U.S. tax of $170,000 on $500,000 of taxable income in 2014. Flint has $200,000 of foreign source taxable income and paid $80,000 of income taxes to the German government on this income. All of the foreign source income is treated as general category income for foreign tax credit purposes. Flint's foreign tax credit on its 2014 tax return will be:
A) $102,000
B) $80,000
C) $68,000
D) $32,000
Q2) The gross profit from a sale of inventory manufactured in the United States and sold in Spain will always be treated as 100 percent U.S. source income.
A)True
B)False
Q3) "Outbound taxation" deals with the U.S. tax rules that apply to U.S. persons doing business outside the United States.
A)True
B)False
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Chapter 25: Transfer Taxes and Wealth Planning of the Cfa Institute
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Q1) The annual exclusion applies to cumulative gifts made to each donee over the course of the year.
A)True
B)False
Q2) This year Brent purchased season baseball tickets in the exclusive sky club. The price of the tickets was $60,000, and Brent divided the tickets equally with his two brothers. Has Brent made a taxable gift and, if so, in what amount?
A) Brent made a taxable gift of $46,000.
B) Brent made two taxable gifts of $17,000 each.
C) Brent transferred the tickets for love and affection so no gift tax is imposed.
D) Brent made two taxable gifts of $6,000.
E) None of these.
Q3) When a gift-splitting election is made, gifts made by either spouse during the year will be treated as if each spouse made one-half of the transfer.
A)True
B)False
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