Advanced Taxation Test Bank
Course Introduction
Advanced Taxation is a comprehensive course designed for students with foundational knowledge of taxation. The course delves into complex aspects of tax law, including corporate, partnership, and international taxation, tax planning strategies, and the analysis of current tax issues and reforms. Students will explore compliance requirements, tax implications for various business entities, tax research techniques, and ethical considerations. Real-world case studies and practical problem-solving exercises prepare students for professional roles in accounting, finance, or law where advanced tax expertise is required.
Recommended Textbook
South Western Federal Taxation 2013 Comprehensive Edition by William H. Hoffman
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28 Chapters
3604 Verified Questions
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Page 2
Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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159 Verified Questions
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Sample Questions
Q1) In terms of probability, which of the following taxpayers would be least likely to be audited by the IRS?
A)Taxpayer owns and operates a check-cashing service.
B)Taxpayer is an employed electrician.
C)Taxpayer just received a $3 million personal injury award as a result of a lawsuit.
D)Taxpayer just won a $1 million slot machine jackpot at a Las Vegas casino.
E)Taxpayer has been audited several times before.
Answer: B
Q2) The pay-as-you-go feature of the Federal income tax on individuals conforms to Adam Smith's canon of certainty.
A)True
B)False
Answer: False
Q3) The tax law allows an income tax deduction for state and local income taxes.Explain why.
Answer: The deduction for state and local income taxes can be justified on the grounds that it mitigates the double tax imposed on the same income.
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Page 3
Chapter 2: Working With the Tax Law
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Sample Questions
Q1) A professional must understand the relative weight of authority within the sources of tax law.
A)True
B)False
Answer: True
Q2) The test for whether a child qualifies for dependency status is first conducted under the qualified child requirement.
A)True
B)False
Answer: True
Q3) The Index to Federal Tax Articles (published by Warren, Gorham, and Lamont) is available in print and electronic formats.
A)True
B)False
Answer: False
Q4) Regulations are arranged in the same sequence as the Internal Revenue Code.
A)True
B)False
Answer: True
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Chapter 3: Computing the Tax
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Sample Questions
Q1) A child who is married can be subject to the kiddie tax.
A)True
B)False
Answer: True
Q2) When separate income tax returns are filed by married taxpayers, one spouse cannot claim the other spouse as an exemption.
A)True
B)False
Answer: False
Q3) Clara, age 68, claims head of household filing status.If she has itemized deductions of $9,500 for 2012, she should not claim the standard deduction.
A)True
B)False
Answer: False
Q4) Under the income tax formula, a taxpayer must choose between deductions from AGI and the standard deduction.
A)True
B)False
Answer: True
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Jacob and Emily were co-owners of a personal residence.As part of their divorce agreement, Emily received sole ownership of their personal residence.This property transfer is classified as a property settlement rather than as alimony as the transfer was a result of a divorce.
A)True B)False
Q2) The B & W partnership earned taxable income of $100,000 for the year. Bryan is entitled to 50% of the profits, but Bryan withdrew only $40,000 during the year. Bryan must include in gross income his $50,000 share of the profits from the partnership.
A)True B)False
Q3) A sole proprietorship purchased an asset for $1,000 in 2012 and its value was $1,500 at the end of 2012. In 2013, the sole proprietorship sold the asset for $1,400.The sole proprietorship realized a taxable gain of $400 in 2013 but an economic loss of $100 in 2013.
A)True B)False
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Chapter 5: Gross Income: Exclusions
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Sample Questions
Q1) A company has a medical reimbursement plan for officers that covers all costs that the insurer will not pay. However, for all employees who are not officers, the medical reimbursement plan applies only after the employee has paid $1,000 from his or her own funds. An officer incurred $1,500 in medical expenses and was reimbursed for that amount. An hourly worker also incurred $1,500 in medical expense and was reimbursed $500.
A)Both employees must include all benefits received in gross income.
B)The officer must include $500 in gross income.
C)The officer must include $1,500 in gross income.
D)The hourly employee must include $1,000 in gross income.
E)None of the above.
Q2) Carla is a deputy sheriff. Her employer requires that she live in the county where she is employed. Housing is very expensive; so the county agreed to pay her $4,800 per year to cover the higher cost of housing. Carla must include the housing supplement in her gross income.
A)True
B)False
Q3) What are the tax problems associated with payments received by a wife from her deceased husband's employer? (Assume the wife renders no services to the employer.)
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Page 7
Chapter 6: Deductions and Losses: in General
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Sample Questions
Q1) If a vacation home is rented for less than 15 days during a year, the only expenses that can be deducted are mortgage interest, property taxes, and personal casualty losses.
A)True
B)False
Q2) Salaries are considered an ordinary and necessary expense of a trade or business if they meet what other requirement? What are the tax consequences if this requirement is not met?
Q3) The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes, but is not allowed for a cash method taxpayer.
A)True
B)False
Q4) The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests.
A)True
B)False
Q5) If a taxpayer operated an illegal business (not drug trafficking), what expenses can be deducted and what expenses are disallowed?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) Last year, Lucy purchased a $100,000 account receivable for $90,000.During the current year, Lucy collected $97,000 on the account.What are the tax consequences to Lucy associated with the collection of the account receivable? No subsequent collections are expected.
A)$0.
B)$2,000 gain.
C)$3,000 loss.
D)$13,000 loss.
E)None of the above.
Q2) Discuss the treatment, including the carryback and carryforward periods, of casualty losses incurred with personal use property.
Q3) The amount of loss for partial destruction of business property is the decline in fair market value of the business property.
A)True
B)False
Q4) Why was the domestic production activities deduction (DPAD) enacted by Congress?
Q5) How is qualified production activities income (QPAI) calculated?
Page 9
Q6) Identify the factors that should be considered in determining whether a transaction is a bona fide loan or a gift.
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Page 10
Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Sample Questions
Q1) James purchased a new business asset (three-year personalty) on July 23, 2012, at a cost of $40,000.James takes additional first-year depreciation Determine the cost recovery deduction for 2012.
A)$8,333.
B)$26,666.
C)$33,333.
D)$41,665.
E)None of the above.
Q2) Jim acquires a new seven-year class asset on September 20, 2012, for $80,000. He placed the asset in service on October 5, 2012.He does not elect to expense any of the asset under § 179 or elect straight-line, cost recovery. He takes additional first-year depreciation.He sells the asset on August 25, 2013.This is the only asset he acquires in 2012. Determine Jim's cost recovery in 2012 and 2013.
Q3) Motel buildings are classified as residential rental real estate.
A)True
B)False
Q4) Discuss the reason for the inclusion amount with respect to leased automobiles.
Q5) Discuss the beneficial tax consequences of an SUV not being classified as a passenger automobile.
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Chapter 9: Deductions: Employee and Self-Employed
Related Expenses
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Q1) Both traditional and Roth IRAs possess the advantage of tax-free accumulation of income within the plan.
A)True
B)False
Q2) Frank established a Roth IRA at age 25 and contributed a total of $131,244 to it over 38 years.The account is now worth $376,000.How much of these funds can Frank withdraw tax-free?
A)$0.
B)$131,244.
C)$244,756.
D)$376,000.
E)None of the above.
Q3) Daniel just graduated from college.The cost of moving his personal belongings from his parents' home to his first job site does qualify for the moving expense deduction.
A)True
B)False
Q4) For tax purposes, "travel" is a broader classification than "transportation."
A)True
B)False
12
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) The phaseout of certain itemized deductions has been reinstated for years beginning in 2012.
A)True
B)False
Q2) Erica, Carol's daughter, has a mild form of autism. Dr.Malone recommends that Carol send Erica to a special school for autistic children when she enters first grade. Erica may include the cost of tuition, meals, and lodging for the special school when computing her medical expense deduction.
A)True
B)False
Q3) Joe, who is in the 33% tax bracket in 2012, expects to retire in 2013 and be in the 25% tax bracket. He plans to donate $50,000 to his church. Because he will not have the cash available until 2013, Joe donates land (long-term capital gain property) with a basis of $10,000 and fair market value of $50,000 to the church in December 2012. He reacquires the land for $50,000 in February 2013. Discuss Joe's tax objectives and all tax issues related to his actions.
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Page 13
Chapter 11: Investor Losses
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Sample Questions
Q1) Pablo, who is single, has $95,000 of salary, $10,000 of income from a limited partnership, and a $27,000 passive loss from a real estate rental activity in which he actively participates.His modified adjusted gross income is $95,000.Of the $27,000 loss, how much is deductible?
A)$0.
B)$10,000.
C)$25,000.
D)$27,000.
E)None of the above.
Q2) Orange Corporation, a closely held (non-personal service) C corporation, earns active income of $300,000 in the current year.The corporation also receives $35,000 in dividends and incurs a loss of $50,000 from an investment in a passive activity.What is Orange's income for the year after considering the passive investment?
Q3) In the current year, Kenny has a $35,000 loss from a real estate rental activity.Kenny provides 1,000 hours of service to that activity, which is more than half of his working hours for the year.Kenny can deduct the $35,000 loss.
A)True
B)False
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Chapter 12: Tax Credits and Payments
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Sample Questions
Q1) The calculation of FICA and the self-employment tax both involve two components: the Social Security portion and the Medicare portion, each portion of which is imposed on the same base amounts.
A)True
B)False
Q2) All taxpayers are eligible to take the basic research credit.
A)True
B)False
Q3) Which of the following correctly reflects current rules regarding estimated tax payments for individuals?
A)Employees are not subject to the estimated tax payment provisions.
B)Any penalty imposed for underpayment is deductible for income tax purposes.
C)Married taxpayers may not make joint estimated tax payments unless they file a joint income tax return.
D)No quarterly payments are required if the taxpayer's estimated tax is under $1,000.
E)None of the above.
Q4) Explain the purpose of the disabled access credit and describe the general characteristics of its computation.
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Chapter 13: Property Transactions: Determination of Gain or
Loss, Basis Considerations, and Nontaxable
Exchanges-Part 2
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Sample Questions
Q1) Define fair market value as it relates to property transactions.
Q2) Melissa, age 58, marries Arnold, age 50, on June 1, 2012.Melissa decides to sell her principal residence on August 1, 2012, which she has owned and occupied for the past 30 years.Arnold has never owned a house.However, while he was married to Kelly who died 6 months prior to his marriage to Melissa, Kelly used the § 121 election on the sale of her residence in January 2010 to reduce her realized gain from $123,000 to $0.Kelly used the sales proceeds to pay off Arnold's gambling debts.Can Melissa elect the § 121 exclusion on the sale of her residence? What is the maximum § 121 exclusion available to Melissa and Arnold if they file a joint return?
Q3) Butch sells land with an adjusted basis of $88,000 and a fair market value of $160,000 to Cynthia, his wife, for $160,000.Discuss how the tax consequences would differ if Butch and Cynthia had never been married.
Q4) What effect does a deductible casualty loss have on the adjusted basis of property?
Q5) Identify two tax planning techniques that can be used to avoid the wash sale disallowance of loss.
Q6) What is a deathbed gift and what tax consequences apply?
Q7) Discuss the treatment of losses from involuntary conversions. Page 16
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Page 17
Chapter 13: A: Property Transactions:
Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges-Part 1
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Sample Questions
Q1) Shari exchanges an office building in New Orleans (adjusted basis of $700,000) for an apartment building in Baton Rouge (fair market value of $900,000).In addition, she receives $100,000 of cash.Shari's recognized gain is $100,000 and her basis for the apartment building is $800,000 ($700,000 adjusted basis + $100,000 recognized gain).
A)True
B)False
Q2) At a particular point in time, a taxpayer can have one or two principal residences for § 121 exclusion purposes.
A)True
B)False
Q3) Livestock of different sexes can qualify for like-kind exchange treatment if the livestock has been held for over one year.
A)True
B)False
Q4) Section 1033 (nonrecognition of gain from an involuntary conversion) applies to both gains and losses.
A)True
B)False
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Chapter 14: Property Transactions: Capital Gains and
Losses, 1231, Recapture Provisions
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Sample Questions
Q1) Ramon is in the business of buying and selling securities. Which of the following is a capital asset for Ramon?
A)The securities he buys and sells each day in the normal course of his business.
B)The securities he designates as held for investment at the end of the day of acquisition.
C)The securities he holds more than 12 months.
D)All the securities he owns.
E)b., c., and d.
Q2) The § 1245 depreciation recapture potential does not reduce the amount of the charitable contribution deduction under § 170.
A)True
B)False
Q3) When an individual taxpayer has a net long-term capital gain that includes both 25% gain and 0%/15% gain, which of these gains will be taxed first when the alternative tax on net long-term capital gain method is used and what difference does it make?
Q4) What characteristics must the seller of a patent have in order to be classified as a holder?
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Chapter 15: Alternative Minimum Tax
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Q1) Business tax credits reduce the AMT and the regular income tax in the same way.
A)True
B)False
Q2) The required adjustment for AMT purposes for pollution control facilities placed in service in 2012 is equal to the difference between the amortization deduction allowed for regular income tax purposes and the depreciation deduction computed under ADS.
A)True
B)False
Q3) Income from some long-term contracts can be reported using the completed contract method for regular income tax purposes, but the percentage of completion method is required for AMT purposes for all long-term contracts.
A)True
B)False
Q4) Can AMT adjustments and preferences be both positive and negative?
Q5) Julia's tentative AMT is $94,000. Her regular income tax liability is $72,000. Julia's AMT is $22,000.
A)True
B)False
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Chapter 16: Accounting Periods and Methods
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Q1) Wendy sold property on the installment basis in 2011 for more than her basis in the property. Wendy was to receive installment payments at the end of each year for the next five years. In 2012, before she collected on the installment obligation for that year, Wendy gave to her daughter (Wilma) the installment obligation so that she could collect the four remaining installments.
A)Wilma must recognize the gain from all the amounts collected on the installment obligation in 2012 and subsequent years.
B)Wendy must recognize the gain each year when Wilma collects on the installment obligation.
C)Wilma must recognize the remaining installment sale gain in 2012.
D)Wendy must recognize the remaining installment sale gain in 2012 and Wilma will not recognize gain from collecting on the installment obligation.
E)None of the above.
Q2) In the case of a sale reported under the installment method, no gain is reported until the seller has recovered the entire cost of the property sold.
A)True
B)False
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Page 21
Chapter 17: Corporations: Introduction and Operating Rules
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Q1) Orange Corporation owns stock in White Corporation and has net operating income of $400,000 for the year.White Corporation pays Orange a dividend of $60,000.What amount of dividends received deduction may Orange claim if it owns 15% of White stock (assuming Orange's dividends received deduction is not limited by its taxable income)?
A)$9,000.
B)$42,000.
C)$48,000.
D)$60,000.
E)None of the above.
Q2) Eagle Company, a partnership, had a short-term capital loss of $10,000 during the year. Aaron, who owns 25% of Eagle, will report $2,500 of Eagle's short-term capital loss on his individual tax return.
A)True
B)False
Q3) Adrian is the president and sole shareholder of Pigeon Corporation.He also lends money and rents a building to the corporation.Discuss how these business relationships between Adrian and Pigeon Corporation can help avoid double taxation. What limitations are there on the use of such relationships?
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Chapter 18: Corporations: Organization and Capital Structure
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Q1) One month after Sally incorporates her sole proprietorship, she gives 25% of the stock to her children.Section 351 cannot apply to Sally because she has not satisfied the 80% control requirement.
A)True
B)False
Q2) Tom and George form Swan Corporation with the following investments: Tom transfers machinery worth $100,000 (basis of $40,000), while George transfers land worth $90,000 (basis of $20,000) and services rendered in organizing the corporation worth $10,000.Each is issued 25 shares in Swan Corporation.With respect to the transfers:
A)Tom has no recognized gain; George recognizes gain/income of $80,000.
B)Neither Tom nor George recognizes gain or income.
C)Swan Corporation has a basis of $30,000 in the land.
D)George has a basis of $30,000 in the shares of Swan Corporation.
E)None of the above.
Q3) The use of § 351 is not limited to the initial formation of a corporation, and it can apply to later transfers as well.
A)True
B)False
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Chapter 19: Corporations: Distributions Not in Complete
Liquidation
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Q1) The gross estate of John, decedent, includes stock in Crimson Corporation and Jade Corporation valued at $1.3 million and $2 million, respectively. John's adjusted gross estate is $9 million. He owned 23% of the Crimson stock and 31% of the Jade stock. Immediate members of John's family own the remaining shares of both Crimson and Jade. Those individuals are also the sole beneficiaries of John's estate. Death taxes and funeral and administration expenses for John's estate are $1.3 million. John had a basis of $475,000 in the Crimson stock and $510,000 in the Jade stock. Crimson Corporation (E & P of $3 million) distributed land worth $1.3 million (basis of $800,000) to John's estate in redemption of all of the Crimson stock. Which of the following is a correct statement regarding the tax consequences of this redemption?
A)The estate recognizes dividend income of $1.3 million on the redemption.
B)Crimson Corporation recognizes no gain on the distribution of the land.
C)The estate recognizes no gain or loss on the redemption.
D)The estate has a basis of $800,000 in the land.
E)None of the above.
Q2) The terms "earnings and profits" and "retained earnings" are identical in meaning.
A)True B)False
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) Explain whether shareholders are exempted from gain/loss recognition in nontaxable corporate reorganization or the gain/loss recognition is merely postponed.If postponed, what is the vehicle for ensuring the postponed gain/loss will be recognized in the future?
Q2) Lyon has 100,000 shares outstanding that are worth $10 per share.It uses 32% of its stock plus $80,000 to
Q3) Brown Corporation purchased 85% of the stock of Green Corporation five years ago for $850,000.In the current year, Brown Corporation liquidates Green Corporation and acquires assets with a basis to Green Corporation of $700,000 (fair market value of $1.1 million).Brown Corporation will have a basis in the assets of $700,000, the same as Green's basis in the assets.
A)True
B)False
Q4) Since debt security holders do not own stock, they do not fall under the corporate reorganization rules.
A)True
B)False
Q5) Discuss the role of letter rulings in corporate reorganizations.
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Chapter 21: Partnerships
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Q1) Which of the following partnership owners is personally liable for the entity's debts to general creditors?
A)A partner in a limited liability partnership.
B)A member of a limited liability company.
C)A limited partner in a limited partnership.
D)A general partner in a limited partnership.
E)None of these owners are personally liable for entity debts.
Q2) Loss will be recognized on any distribution from a partnership in which cash, unrealized receivables and/or appreciated inventory are the only items distributed.
A)True
B)False
Q3) The primary purpose of the partnership agreement is to document the various tax elections made by the partners regarding depreciation methods, treatment of research and experimental costs, calculation of the § 199 deduction, and the § 754 election. A)True
B)False
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26
Chapter 22: S: Corporations
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Q1) An S shareholder's basis in his or her stock can be reduced below zero.
A)True
B)False
Q2) When loss assets are distributed by an S corporation, a shareholder's basis is equal to the asset's fair market value.
A)True
B)False
Q3) On January 2, 2011, Tim loans his S corporation $10,000.By the end of 2011, Tim's stock basis is zero, and the basis in his note has been reduced to $8,000.During 2012, the company's operating income is $10,000.The company also makes distributions to Tim of $8,000.Tim reports a(n):
A)$2,000 LTCG.
B)$8,000 LTCG.
C)Stock basis of $2,000.
D)Loan basis of $10,000.
Q4) Tax-exempt income is not separately stated on Schedule K of Form 1120S.
A)True
B)False
Q5) How may an S corporation manage its liability for the built-in gains tax?
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Chapter 23: Exempt Entities
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Q1) If personal property is leased with real property and more than 45% of the rent income under the lease is from personal property, all of the rent income is subject to the unrelated business income tax.
A)True
B)False
Q2) Which of the following are available options for the IRS in dealing with an exempt organization entering into prohibited transactions?
A)Attempt to subject all or part of the organization's income to Federal income tax.
B)Revoke the exempt status of the organization.
C)Impose intermediate sanctions in the form of threatened loss of exempt status.
D)Only a.and b.
E)a., b., and c.
Q3) The excise tax imposed on a private foundation's investment income can be imposed as an initial (first-level) tax but cannot be imposed as an additional (second-level) tax.
A)True
B)False
Q4) Why are some organizations exempt from Federal income tax?
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Page 28
Chapter 24: Multistate Corporate Taxation
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Q1) Leased property, when included in the property factor, usually is valued at ____________________ times its annual rental, even though the taxpayer does not own the asset. or
Q2) The starting point in computing state taxable income generally is ____________________.
Q3) A state can levy an income tax on a business only if the business was incorporated in the state.
A)True
B)False
Q4) In determining taxable income for state income tax purposes, the Federal NOL deduction typically constitutes a(n) ____________________ modification.
Q5) Typically, a sales/use tax is applied to a retail sale of ____________________ property.
Q6) Typically, corporate income taxes constitute about 20 percent of a state's tax collections.
A)True B)False
Q7) An ad valorem property tax is based on the asset's current ____________________.
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Chapter 25: Taxation of International Transactions
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Q1) Your client holds foreign tax credit (FTC) carryforwards, i.e., it is in an "excess credit" position. Give at least three planning ideas that the client should implement, so as to free up the suspended FTCs.
Q2) Which of the following transactions, if entered into by an NRA, is not subject to U.S.taxation?
A)Sale of a commercial building located in Houston, Texas, and owned directly by the NRA.
B)Sale of stock of a foreign corporation whose only asset is a U.S.building.
C)Sale of stock of a domestic corporation whose only asset is undeveloped U.S.real estate.
D)Sale of partnership interest.The partnership's assets predominantly are made up of U.S.real estate.
Q3) The purpose of the transfer pricing rules is to ensure that taxpayers have ultimate flexibility in shifting profits between related entities.
A)True
B)False
Q4) Describe and diagram the timeline that most businesses use to enter the international markets.
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Page 30
Chapter 26: Tax Practice and Ethics
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147 Verified Questions
147 Flashcards
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Sample Questions
Q1) Lola, a calendar year taxpayer subject to a 35% marginal gift tax rate, made a gift of a sculpture to Redd, valuing the property at $70,000.The IRS later valued the gift at $100,000.The applicable undervaluation penalty is:
A)$0.
B)$1,000 (minimum penalty).
C)$2,100.
D)$10,500.
Q2) Currently, the IRS charges a ____________________% interest rate on taxes that the taxpayer underpays. or
Q3) An "office audit" takes place at the headquarters office of the corporate taxpayer. A)True B)False
Q4) A CPA can take a tax return position for a client that is contrary to current IRS interpretations of the law. A)True B)False
Q5) The IRS is a subsidiary agency of the Department of the
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Chapter 28: Income Taxation of Trusts and Estates
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145 Verified Questions
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Sample Questions
Q1) The Doyle Trust reports distributable net income for the year of $100,000 and no income from tax-exempt sources.Under the terms of the trust instrument, the trustee must distribute $30,000 to Roger and $30,000 to Sally.After payment of these amounts, the trustee is empowered to make additional distributions at its discretion.Exercising this authority, the trustee distributes an additional $25,000 to Roger and $25,000 to Sally.How much income from the trust must Sally recognize?
A)$25,000.
B)$30,000.
C)$50,000.
D)$55,000.
Q2) The IRS encourages ____________________ filing for Forms 1041.
Q3) When the Holloway Trust terminated this year, it held a $1 million NOL carryforward. How is the loss carryforward treated? Does it expire with the trust or can another taxpayer use it? Be specific.
Q4) Generally, an estate's taxable income is computed in a manner similar to that used for a(n) ____________________.
Q5) Identify the parties that are present when an estate is created, and their key duties. Then do the same for a trust.
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