Business Law and Taxation
Chapter Exam Questions
Course Introduction
This course explores the fundamental principles of business law and taxation that affect individuals and organizations in the modern commercial environment. Students will examine legal frameworks such as contract law, company law, employment law, and intellectual property, with a focus on their application in business operations and decision-making. The course also covers key concepts in taxation, including income tax, corporate tax, and indirect taxes, emphasizing compliance, reporting requirements, and the impact of taxation on business strategy. Through real-world case studies and practical examples, students will develop the skills needed to identify legal and tax risks, understand regulatory responsibilities, and support ethical business practices.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 2016 19th Edition by Sally Jones
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Chapter 1: Taxes and Taxing Jurisdictions
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Q1) Company N operates a mail order business out of its headquarters in Tulsa, Oklahoma. This year, it mailed $892,000 worth of product to customers residing in Oklahoma and $489,300 worth of product to customers residing in Missouri. Which of the following statements is true?
A) Company N must collect Oklahoma sales tax from its Oklahoma customers and Missouri sales tax from its Missouri customers.
B) Company N must collect Oklahoma sales tax from both its Oklahoma and Missouri customers.
C) Company N must collect Oklahoma sales tax from its Oklahoma customers.
D) Company D is not required to collect sales tax on any mail order sales.
Answer: C
Q2) Which of the following is an earmarked tax?
A) A tax imposed on the purchase of specific items such as liquor or cigarettes
B) A tax that generates revenues that the government can spend only to build more National Parks
C) A tax imposed only on individuals who earn more than $1 million annually
D) A tax that generates revenues that the government can spend for any purpose
Answer: B
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Chapter 2: Policy Standards for a Good Tax
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Q1) The state of California plans to amend its personal income tax laws to allow parents to reduce their tax by the cost of infant car seats. Which of the following statements is true?
A) The amendment creates a tax preference for parents who purchase infant car seats.
B) The amendment is intended to change social behavior.
C) The amendment increases the neutrality of the tax law.
D) Both the amendment creates a tax preference for parents who purchase infant car seats and is also intended to change social behavior are true.
Answer: D
Q2) According to the classical concept of efficiency, an efficient tax should be neutral in its effect on free market allocations of economic resources.
A)True
B)False
Answer: True
Q3) The federal government is not required to pay interest on the national debt.
A)True
B)False
Answer: False
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Chapter 3: Taxes As Transaction Costs
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Q1) The tax cost of a transaction depends on the taxpayer's average tax rate for the year.
A)True
B)False
Answer: False
Q2) When the IRS audits a tax return, it is most likely to scrutinize the tax consequences of a/an:
A) Related party transaction
B) Private market transaction
C) Public market transaction
D) Arm's length transaction
Answer: A
Q3) Use the present value tables included in Appendix A of your textbook to compute the NPV of $12,500 received in year 5 at a 6% discount rate.
A) $8,745.5
B) $9,337.5
C) $9,900
D) None of the above
Answer: B
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Chapter 4: Maxims of Income Tax Planning
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Q1) The tax law applies uniformly to every commercial transaction by every business entity.
A)True
B)False
Q2) Mrs. Lester has the choice between two transactions. Transaction A will generate $175,000 taxable cash flow in the current year (year 0). Transaction B will generate $160,000 cash flow in the current year, but Mrs. Lester will not be required to report $160,000 income for two years (year 2). Mrs. Lester has a 40% marginal tax rate and uses a 9% discount rate to compute NPV. Which of the following statements is true?
A) Mrs. Lester should choose transaction A because it generates more before-tax cash flow than transaction B
B) Mrs. Lester should choose transaction A because its NPV exceeds transaction B's NPV.
C) Mrs. Lester should choose transaction B because the tax cost is deferred one year.
D) Mrs. Lester should choose transaction B because its NPV exceeds transaction A's NPV.
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Chapter 5: Tax Research
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Q1) A revenue ruling cannot be relied on as authority by any taxpayer other than the taxpayer for whom the ruling was issued.
A)True
B)False
Q2) When performing step two of the tax research process:
A) The identification of tax issues precedes the formulation of research questions.
B) Research questions should be as broadly stated as possible.
C) Each tax issue is always associated with a single research question.
D) The order in which research questions are addressed is irrelevant.
Q3) In circumstances requiring an evaluative judgment, the tax researcher can provide can provide a definitive answer to the research question.
A)True
B)False
Q4) A taxpayer who loses a case in the U.S. Tax Court may appeal the case directly to the U.S. Supreme Court.
A)True
B)False
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Chapter 6: Taxable Income From Business Operations
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Q1) A taxpayer that operates more than one business may use a different method of accounting for each business.
A)True
B)False
Q2) 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.
Q3) PPQ Inc. wants to change from a hybrid method of accounting to the accrual method of accounting for tax purposes. PPQ can't make this change without receiving permission from the IRS.
A)True
B)False
Q4) An unfavorable temporary book/tax difference generates a deferred tax asset.
A)True
B)False
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Q1) Which of the following capitalized cost is not amortizable for tax purposes?
A) Purchase cost of a partnership interest
B) Purchase cost of business goodwill
C) Leasehold cost
D) Purchase cost of a patent
Q2) A firm can use LIFO for computing cost of goods sold for tax purposes only if it uses LIFO for financial reporting purposes.
A)True
B)False
Q3) Belsap Inc., a calendar year taxpayer, purchased a total of $59,000 depreciable personalty during May 2015. Which of the following statements is true?
A) Belsap can elect to expense 100% of the cost.
B) The amount of cost that Belsap can elect to expense depends on Belsap's 2015 taxable income.
C) Belsap can elect to expense $25,000 of the cost. The $34,000 remaining cost is capitalized and subject to MACRS depreciation.
D) Belsap can elect to expense $25,000 of the cost. The $34,000 remaining cost is capitalized and is not depreciable.
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Chapter 8: Property Dispositions
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Q1) Lettuca Inc. generated a $77,050 ordinary loss from operations this year. It also recognized $5,920 recaptured ordinary income, $55,000 net Section 1231 loss, and $7,840 net capital loss on the sale of assets. Compute Lettuca's net operating loss.
A) $(77,050)
B) $(126,130)
C) $(132,050)
D) $(133,970)
Q2) The gain or loss recognized on any disposition of a capital asset is characterized as capital gain or loss.
A)True
B)False
Q3) Andrew sold IBM stock to his sister Susan for $6,000. Andrew purchased the stock two years ago for $8,000. Susan sold the stock through her broker for $7,300. How much gain or loss did Susan recognize on the sale?
A) $700 loss
B) No gain or loss
C) $1,300 gain
D) None of the above
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Chapter 9: Nontaxable Exchanges
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Q1) A partnership always takes a carryover basis in property received from a partner in exchange for an equity interest in the partnership.
A)True
B)False
Q2) Eight years ago, Prescott Inc. realized a $16,200 gain on the exchange of old equipment for new equipment. Prescott included the gain in book income, but the exchange was nontaxable. This year, Prescott sold the new equipment for $2,500. At date of sale, the equipment's book basis and tax basis had both been depreciated to zero. Which of the following statements is true?
A) The nontaxable exchange had no effect on Prescott's deferred tax accounts.
B) The nontaxable exchange resulted in a deferred tax asset.
C) The sale of the new equipment had no effect on Prescott's deferred tax accounts.
D) None of the above is true.
Q3) If a taxpayer elected to defer a $13,000 gain realized on an involuntary conversion, the tax basis of the taxpayer's replacement property equals the cost of the property less $13,000.
A)True
B)False
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Chapter 10: Sole Proprietorships, Partnerships, Llcs, and S
Corporations
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Q1) At the beginning of 2015, Quentin purchased a 25 percent general partner interest in Maxim Partnership for $30,000. Quentin's 2015 Schedule K-1 reported that his share of Maxim's debt at year-end was $20,000 and his share of ordinary loss was $42,000. On January 1, 2016, Quentin sold his interest to another partner for $5,000 cash.
a. How much of his share of Maxim's loss can Quentin deduct on his 2015 return?
b. Compute Quentin's recognized gain on sale of his Maxim interest.
Q2) A partner's distributive share of partnership profits will increase his or her tax basis in the partnership interest.
A)True
B)False
Q3) Cramer Corporation and Mr. Chips formed a general partnership. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Mr. Chips' tax basis in its partnership interest?
A) $500,000
B) $1,200,000
C) $850,000
D) $650,000
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Chapter 11: The Corporate Taxpayer
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Q1) Which of the following is a means to avoid the double taxation burden imposed on the profits of corporations?
A) Treat all corporations as passthrough entities for federal tax purposes.
B) Enact tax legislation that would make dividends nontaxable to all of the corporation's shareholders.
C) Allow corporate shareholders a credit on their tax returns for the taxes paid by the corporation on the profits currently distributed to such shareholders as dividends.
D) All of the above would avoid double taxation.
Q2) Fleet, Inc. owns 85% of the stock of Pete, Inc. and 35% of the stock of Zete, Inc. The remaining stock of Pete and Zete is owned by unrelated individuals. Which of the following statements is correct?
A) Fleet, Pete, and Zete are an affiliated group.
B) Fleet and Zete are an affiliated group.
C) Fleet and Pete are an affiliated group.
D) There is no affiliated group here.
Q3) Corporations are rarely targeted in political debates over taxation.
A)True
B)False
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Chapter 12: The Choice of Business Entity
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Q1) Which of the following statements regarding the accumulated earnings tax is true?
A) The accumulated earnings tax is imposed instead of the regular corporate income tax.
B) The accumulated earnings tax is intended to coerce corporations to pay dividends.
C) The accumulated earnings tax is calculated by the corporation and paid on its annual corporate income tax return.
D) All of the above statements are true.
Q2) Typical family-owned businesses are operated as passthrough entities.
A)True
B)False
Q3) Bryan Houlberg expects his C corporation to generate a profit of $200,000. What is Bryan's after-tax cash flow from the corporation if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 39.6%?
A) $120,800
B) $90,188
C) $111,000
D) $151,438
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Chapter 13: Jurisdictional Issues in Business Taxation
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Q1) Transfer prices cannot be used by U.S. corporations and their foreign affiliates to shift income between taxing jurisdictions.
A)True
B)False
Q2) The United States has jurisdiction to tax income earned by any foreign corporation that is a controlled subsidiary of a U.S. parent corporation.
A)True
B)False
Q3) According to Public Law 86-272, the sale of tangible goods to residents of a state is not sufficient to establish nexus in that state.
A)True
B)False
Q4) The UDITPA formula for state income tax apportionment consists of three factors: sales, payroll, and profit.
A)True
B)False
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Chapter 14: The Individual Tax Formula
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Q1) Mrs. Lincoln was employed by GGH Inc. until October, when he accepted a new position with Murdock Inc. Mrs. Lincoln earned $145,000 compensation from GGH and $36,000 compensation from Murdock. Which of the following statements is false?
A) Murdock must withhold Social Security tax from Mrs. Lincoln's $36,000 compensation.
B) Murdock must withhold Medicare tax from Mrs. Lincoln's $36,000 compensation.
C) Mrs. Lincoln is entitled to an income tax credit for both excess Social Security tax and excess Medicare tax withheld by her employers this year.
D) Both GGH and Murdock must pay the full amount of employer payroll tax on the compensation paid to Mrs. Lincoln.
Q2) The earned income credit is available only to low-income taxpayers with dependent children.
A)True
B)False
Q3) An individual must pay the greater of her regular income tax or her alternative minimum tax (AMT) for the year.
A)True
B)False
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Chapter 15: Compensation and Retirement Planning
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Q1) Mr. and Mrs. Williams are the sole shareholders of Lessing, Inc., a regular corporation. Last year, Lessing employed the Williams' son and paid him a $50,000 salary. During a recent IRS audit, the revenue agent discovered that the son rarely shows up for work and spends most of his time playing golf. Which of the following statements is true?
A) The IRS can treat the $50,000 payment as a constructive dividend to the son.
B) The IRS can treat the $50,000 payment as a constructive dividend to Mr. and Mrs. Williams.
C) The IRS can disallow Lessing's $50,000 deduction for the son's salary.
D) Both B. and C. are true.
Q2) Employees don't include the value of any compensatory fringe benefits in gross income because the benefit doesn't consist of a direct cash payment.
A)True
B)False
Q3) Keogh plans allow self-employed individuals to save for retirement on a tax-deferred basis.
A)True
B)False
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Chapter 16: Investment and Personal Financial Planning
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Q1) Ten years ago, Elaine paid $10 per share for 2,000 shares of Lazlo common stock. This year, Elaine learned that Lazlo is in bankruptcy and can pay only 40% of its outstanding debt. What are the tax consequences to Elaine of Lazlo's bankruptcy?
A) $20,000 long-term capital loss
B) $12,000 long-term capital loss
C) $20,000 ordinary loss
D) No gain or loss
Q2) Mrs. Lindt exchanged 212 shares of Nipher common stock for 773 shares of Newland common stock. Her basis in the Nipher stock was $49,200, and the fair market value of the Newland stock was $138,000. Which of the following statements about the exchange is true?
A) Mrs. Lindt's basis in her Newland stock is $138,000.
B) Mrs. Lindt recognizes no gain on the exchange because she did not receive any cash.
C) If the exchange is pursuant to a reorganization of Nipher and Newland, Mrs. Lindt recognizes no gain.
D) None of the above is true.
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Chapter 17: Tax Consequences of Personal Activities
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Q1) Mr. Lightfoot owns three mortgaged residences that he occupies at different times of the year. He can treat the interest paid on only one mortgage as qualified residence interest.
A)True
B)False
Q2) Mr. and Mrs. Allen made the following interest payments. Determine their deduction for each payment.
a. $28,000 on a $400,000 acquisition mortgage secured by their personal residence
b. $5,000 on a $60,000 second mortgage secured by their personal residence. The Allens used the proceeds to pay off credit card debt and take a second honeymoon
c. $2,400 on credit card debt
d. $1,500 on a bank loan incurred to purchase a new family car
e. $1,890 on an unsecured bank loan incurred to pay for a new roof on their personal residence
Q3) Gains realized on the sale of personal use assets are taxable.
A)True
B)False
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Chapter 18: The Tax Compliance Process
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Q1) Which of the following statements about federal tax return filing dates is false?
A) A corporation with a fiscal tax year ending on September 30 must file its unextended Form 1120 by December 15 following the close of the tax year.
B) A corporation may request an automatic extension of time to file Form 1120.
C) A corporation may request an extension of time to pay any balance due of its annual income tax if it has reasonable cause for the delay.
D) None of the above is false.
Q2) The IRS selects returns to audit that have the highest probability of generating additional revenue.
A)True
B)False
Q3) A taxpayer who wants a jury trial must pay the tax deficiency and then sue the government for a refund in U.S. District Court.
A)True
B)False
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