Business Law and Taxation
Chapter Exam Questions
Course Introduction
Business Law and Taxation provides an in-depth exploration of the legal and regulatory framework that governs business operations and tax obligations. The course covers fundamental topics such as contracts, company law, intellectual property, employment law, and dispute resolution, alongside key principles of taxation, including tax planning, compliance, and the implications of various tax regulations on different business structures. Through real-world case studies and practical exercises, students gain the knowledge and skills needed to navigate the complex intersection of law, tax, and ethical issues in the business environment, equipping them to make informed decisions and ensure organizational compliance.
Recommended Textbook Concepts in Federal Taxation 2019 26th Edition Kevin E. Murphy
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Chapter 1: Federal Income Taxation-An Overview
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Q1) Heidi and Anastasia are residents of the mythical country of Wetland. Heidi pays $1,500 income tax on taxable income of $6,000. Anastasia pays income tax of $21,000 on taxable income of $72,000. The income tax structure is
I.Progressive.
II.Proportional.
III.Regressive.
IV.Value-added.
V.Marginal.
A)Only statement I is correct.
B)Only statement II is correct.
C)Only statement III is correct.
D)Only statement V is correct.
E)Statements II and IV are correct.
Answer: A
Q2) A tax is an enforced contribution used to finance the functions of government. A)True
B)False
Answer: True
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Page 3
Chapter 2: Income Tax Concepts
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Q1) Under the pay-as-you-go concept, the tax base used to compute the taxpayer's income tax liability is a net income number.
A)True
B)False
Answer: False
Q2) When Kerri filed her 2018 tax return on April 15, 2019, she did not include a $2,000 bonus received from her employer on January 10, 2019 relating to her work performance during 2018. What concept, construct, or doctrine supports Kerri's actions?
A)Arms-length Transaction Concept.
B)Substance Over Form Doctrine.
C)Constructive Receipt Doctrine.
D)Claim of Right.
E)Entity Concept.
Answer: C
Q3) All deductions are allowed because of the legislative grace concept.
A)True
B)False
Answer: True
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Chapter 3: Income Sources
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Q1) On January 1 of the current year, Beverly borrows $100,000 from her employer, Happy Hills Nursing Home. Beverly uses this loan to pay off credit cards and consumer loans. Happy Hills considers Beverly to be a loyal employee, and allows her up to five years to repay the loan. Beverly is not a shareholder or officer in the Happy Hills. Happy Hills does not charge any interest on the loan. Both Happy Hills and Beverly are on a December 31 fiscal year end. What is the income tax issue for Happy Hills? You do not need to do any calculations.
Answer: At least one of the following should be discussed: - Imputed interest rules
- Below-market rate loans
- Employment-related loans
- Arm's-length transaction concept
- The amount of imputed interest is compensation income to Beverly and deductible compensation expense for Happy Hills.
Q2) For any unrecovered portion of an annuity investment, the taxpayer is allowed a deduction in the year of death.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Income Exclusions
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Q1) Rex is a programmer with Monon Electronics Corporation. His annual salary is $50,000. As part of his compensation package, he receives a term-life insurance policy equal to his annual salary. All members of the programming staff receive this benefit.
Members of the sales staff have a cafeteria plan from which to select various benefits including life and health insurance coverage.
I.Rex has an excludable amount of income because of the nature of his employment benefit.
II.Rex must include $50,000 in his gross income because that is the value of the insurance benefit.
III.Rex must include the cost of the insurance policy in his gross income.
IV.If the benefit is only available to "key" employees and Rex is a "key" employee, he may exclude the cost of the premiums paid from his gross income.
A)Only statement I is correct.
B)Only statement II is correct.
C)Only statement III is correct.
D)Statements I and IV are correct.
E)Statements II and IV are correct.
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Page 6
Chapter 5: Introduction to Business Expenses
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Q1) Economic Performance
A)Specifically disallowed.
B)Appropriate and helpful.
C)Considered a trade or business.
D)Not considered a trade or business.
E)Problems with this generally arise with related parties.
F)This is met when services or property are provided to the taxpayer.
G)Normal, common, and accepted but not necessarily regularly recurring.
H)This is met when the existence and the amount of a liability have been established.
Q2) Pamela owns the building where her plumbing supply business is located. This year she put on vinyl siding to replace the weathered wood siding on her building. The cost of the new siding can be expensed in the current year.
A)True
B)False
Q3) Evelyn can reduce her adjusted gross income by having her partnership pay her charitable contributions rather her paying them.
A)True
B)False
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Chapter 6: Business Expenses
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Questions
Q1) Kadian purchases a block of 10 tickets to next Saturday's basketball game. The tickets cost $45 each. He keeps two tickets for himself and gives the remaining tickets to 8 business customers. Each customer receives a ticket, and Kadian told all of them he would see them Saturday night. How much can Kadian deduct?
A)$- 0 -
B)$100
C)$200
D)$360
E)$450
Q2) Auto, travel, and gift expenses are subject to strict documentation requirements. Taxpayers are required to keep records that show
I.The business purpose of the event.
II.The time and place of the event.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
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Chapter 7: Losses-Deductions and Limitations
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Q1) During the current year, Alyssa incurred a net loss of $27,500 from a 5 percent interest in a partnership that operated and managed an office building. Alyssa had adjusted gross income from other sources of $110,000 and spent 67 hours assisting in the management of the building. Determine Alyssa's total adjusted gross income for the current year.
A)$82,500
B)$90,000
C)$100,000
D)$105,000
E)$110,000
Q2) Any corporate capital loss not used in the current year can be carried back 2 years and carried forward 20 years to offset capital gains in those years.
A)True
B)False
Q3) Why do the wash sale rules apply to the sale of stock at a loss but not to the sale of stock at a gain?
Q4) If a corporation incurs a net operating loss of $10,000 in 2018, what would cause it not to deduct the entire $10,000 in 2019?
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Page 9
Chapter 8: Taxation of Individuals
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Q1) During the current year, Robbie and Anne pay the following taxes: ?
\[\begin{array} { l r }
\text { State income tax (bal ance due for last year) } & \$ 1,000 \\
\text { Estimated state income tax } & 2,400 \\
\text { Estimated federal income tax } & 3,250 \\
\text { Sales tax (Federal Sales tax table) } & 600 \\
\text { State gift tax } & 700 \\
\text { Property tax on personal residence } & 2,450 \\
\text { Real estate tax on condominium in Breckinridge, CO. } & 1,100
\end{array}\]
What amount can Robbie and Anne claim as an itemized deduction for taxes on their federal income tax return for the year?
A)$5,850
B)$6,950
C)$7,550
D)$8,050
E)$11,300
Q2) Explain the support test and the gross income test to be a qualifying relative.
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Page 10
Chapter 9: Acquisitions of Property
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Q1) Split basis
A)Begins on the day after acquisition and ends on the day of disposition.
B)The initial investment in an asset.
C)An asset's basis transfers from one owner to another.
D)The capital investment remaining in an asset at the date of its disposition.
E)Sales price less expenses of disposition.
F)A purchase of all of the assets of a business.
G)Amount realized is less than adjusted basis.
H)A purchase of all of the assets of a business by buying the stock of a corporation.
I)A term used to identify a situation in which an asset has a different basis for determining gain than for determining loss.
J)The date of death used to value a decedent's estate in the absence of any special election.
K)Six months after the date of death, used to value a decedent's estate when the executor of the estate makes election.
L)Amount realized is greater than adjusted basis.
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Chapter 10: Cost Recovery on Property: Depreciation, Depletion, and Amortization
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Q1) Pedro purchased used delivery equipment costing $80,000 and used computers costing $90,000 (the only assets purchased) that are used in his business. He may allocate his section 179 deduction to either or both assets.
A)True
B)False
Q2) To compute depreciation using MACRS on an asset purchased today, you need to know
I.the asset's depreciable basis.
II.the recovery period of the asset.
III.the first and last year convention that applies to the asset's class.
IV.whether you want to minimize or maximize the current year's depreciation.
A)Only statement II is correct.
B)Statements I and II are correct.
C)Statements I, III, and IV are correct.
D)Statements II and III are correct.
E)Statements I, II, III, and IV are correct.
Q3) Discuss why listed property gets special attention.
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Chapter 11: Property Dispositions
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Q1) Omicron Corporation had the following capital gains and losses for 2016 through 2018: ?
\[\begin{array} { c c c } 2016 & 2017 & 2018 \\ \$ 15,000 & \$ ( 30,000 ) & \$ 60,000 \end{array}\]
Omicron's net capital gain for 2018 is:
A)$20,000
B)$30,000
C)$45,000
D)$60,000
Q2) Depreciation recapture provisions
I.are reclassification provisions.
II.apply to depreciable assets sold at a gain.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
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Page 13
Chapter 12: Non-Recognition Transactions
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Q1) Which of the following qualifies as a like-kind exchange of property?
I.Commercial retail building and its land for an office building and its land.
II.Louisiana Oil, Inc. common stock for Louisiana Oil, Inc. corporate bonds.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) When two qualified assets are exchanged and their fair market values are not equal, additional nonqualifying property referred to as "boot" can be used to equalize the transaction without disqualifying the nonrecognition transaction.
A)True
B)False
Q3) A flood destroys Franklin's manufacturing facility. The building had a basis of $600,000 when destroyed. Franklin's insurance company reimburses him $850,000, the appraised replacement cost of the building. Franklin purchases a qualified replacement facility for $1,100,000. Discuss the tax effects of these transactions applying the concepts of taxation that drive your answers.
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Page 14
Chapter 13: Choice of Business Entity-General Tax and
Nontax
Factorsformation
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Q1) Which of the following taxable years are allowable by a newly formed partnership without obtaining prior approval from the IRS?
I.A January 31 year-end if it is a retail enterprise with a natural business year ending January 31 and all of its principal partners are on a calendar year.
II.A calendar year if majority partners and principal partners have varied year-ends.
III.A taxable year that is the same as that of its majority partners.
A)Only statement I is correct.
B)Only statement III is correct.
C)Only statement II is correct.
D)Statements II and III are correct.
E)Statements I, II, and III are correct.
Q2) There must be at least one member of a Limited Liability Company who is personally liable for the debts of the business.
A)True
B)False
Q3) Discuss the characteristics of a personal service corporation (PSC).
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Chapter 14: Choice of Business Entity-Operations and Distributions
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Q1) During the current year, Hope Corporation has the following items of income and expense:
?
\[\begin{array} { l r }
\text { Sales } & \$ 420,000 \\
\text { Expenses from operations } & 480,000 \\
\text { Dividends received } & 100,000
\end{array}\]
Hope owns 10% of the domestic corporation that distributed the dividends to Hope. Determine Hope Corporation's net operating loss for the current year.
A)$(35,000)
B)$(50,000)
C)$(30,000)
D)$(10,000)
E)$(25,000)
Q2) A partner's basis is increased by the amount of deductible loss that flows through from the partnership.
A)True
B)False
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Chapter 15: Choice of Business Entity-Other Considerations
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Q1) Posie is an employee of Geiger Technology and earns $90,000 in 2018. The maximum amount Geiger can contribute to a profit sharing plan on behalf of Posie is
A)$6,000
B)$13,500
C)$22,500
D)$25,000
E)$55,000
Q2) The employee's contribution to a nonqualified pension plan cannot be deferred, and the employer is not allowed a tax deduction for the contribution even though the employee includes the contribution in their income.
A)True
B)False
Q3) The tax advantage of a Roth IRA is that although the contributions are not deductible, the distributions of contribution and income are tax-free.
A)True
B)False
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Chapter 16: Tax Research
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Q1) Ways and Means Committee
A)Where federal tax legislation generally originates.
B)Has jurisdiction over all tax matters in the U.S. Senate.
C)The committee responsible for initial hearings and deliberations on a tax bill.
D)Responsible for negotiating a resolution of the differences in the House and Senate versions of a tax bill.
E)The agency within the administrative branch of government with overall responsibility for administration of tax law.
F)Oversees the operation and administration of the tax system as a whole, and prepares a general explanation of any tax bill signed by the President.
Q2) An interpretative regulation is issued when Congress specifically delegates the authority to the Treasury Department to write specific rules for a designated Code section.
A)True
B)False
Q3) Taxpayers may choose one of several different courts in which to initiate litigation. Discuss the pros and cons of the different trial level courts.
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