Income Tax Planning
Midterm Exam
Course Introduction
Income Tax Planning is a comprehensive course that equips students with the knowledge and skills necessary to effectively navigate the complexities of personal and business taxation. The course covers key concepts of the income tax system, including tax laws, regulations, and filing requirements for individuals, sole proprietors, and small businesses. Students will learn how to identify tax-saving opportunities, implement tax-efficient strategies, and utilize credits and deductions to minimize tax liabilities. Emphasis is placed on current tax regulations, ethical considerations in tax planning, and the practical application of tax strategies through real-life scenarios and case studies. By the end of the course, students will be prepared to make informed tax decisions and manage compliance in a dynamic regulatory environment.
Recommended Textbook
South western Federal Taxation 2017 Comprehensive Edition 40th Edition by William H. Hoffman
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Page 2
Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) Taxes not imposed by the Federal government include:
A)Tobacco excise tax.
B)Hotel occupancy tax.
C)Customs duties (tariffs on imports).
D)Gas guzzler tax.
E)None of the above.
Answer: B
Q2) In preparing a tax return, all questions on the return must be answered.
A)True
B)False
Answer: False
Q3) In 2010, Deborah became 65 years old.In 2011 she added a swimming pool, and in 2012 she converted the residence to rental property and moved into an assisted living facility.Since 2009, Deborah's ad valorem property taxes have decreased once and increased twice.Explain.
Answer: The decrease probably came in 2010 when Deborah reached age 65.The increases probably occurred in 2011 when she added the pool and in 2012 when the residence was converted to rental property.
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Chapter 2: Working With the Tax Law
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Q1) Which of the following cannot be found in the Federal Register?
A)Regulations.
B)Temporary Regulations.
C)Proposed Regulations.
D)Revenue Rulings.
E)All of the above may be found in the Federal Register.
Answer: D
Q2) Subchapter P refers to the "Partners and Partnerships" section of the Internal Revenue Code.
A)True
B)False Answer: False
Q3) Temporary Regulations are only published in the Internal Revenue Bulletin.
A)True
B)False Answer: False
Q4) Electronic databases are most frequently searched by the keyword approach.
A)True
B)False
Answer: True
Page 4
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Chapter 3: Computing the Tax
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Q1) Darren, age 20 and not disabled, earns $4,000 during 2012.Darren's parents cannot claim him as a dependent unless he is a full-time student.
A)True
B)False
Answer: True
Q2) Sylvia, age 17, is claimed by her parents as a dependent.During 2012, she had interest income from a bank savings account of $2,000 and income from a part-time job of $4,200.Sylvia's taxable income is:
A)$4,200 - $4,500 = $0.
B)$6,200 - $5,700 = $500.
C)$6,200 - $4,500 = $1,700.
D)$6,200 - $950 = $5,250.
E)None of the above.
Answer: C
Q3) The additional standard deduction for age and blindness is not the same amount for single as for married taxpayers.
A)True
B)False
Answer: True
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) When stock is sold after the record date for a dividend that has been declared, the seller must recognize as income the dividend received.
A)True
B)False
Q2) The alimony rules:
A)Are based on the principle that the person who earns the income should pay the tax.
B)Permit tax deductions for property divisions.
C)Look to state law to determine the definition of alimony.
D)Distinguish child support payments from alimony.
E)None of the above.
Q3) Ted earned $150,000 during the current year.He paid Alice, his former wife, $75,000 in alimony.Under these facts, the tax is paid by the person who benefits from the income rather than the person who earned the income.
A)True
B)False
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Chapter 5: Gross Income: Exclusions
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Q1) Mauve Company permits employees to occasionally use the copying machine for personal purposes.The copying machine is located in the office where the higher paid executives work, so they occasionally use the machine.However, the machine is not convenient for use by the lower paid warehouse employees and, thus, they never use the copier.The use of the copy machine may be excluded from gross income as a de minimis fringe benefit.
A)True
B)False
Q2) Nicole's employer pays her $150 per month towards the cost of parking near a railway station where Nicole catches the train to work.The employer also pays the cost of the rail pass, $75 per month.Nicole can exclude both of these payments from her gross income.
A)True
B)False
Q3) For a person who is in the 35% marginal tax bracket, $1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax.
A)True
B)False
Q4) What Federal income tax benefits are provided for college students?
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Chapter 6: Deductions and Losses: in General
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Q1) In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of the stock on the date of sale.Five months later, James sold the same stock through his broker for $27,000.What is the tax effect of these transactions?
A)Disallowed loss to James of $2,000; gain to Lance of $1,000.
B)Disallowed loss to Lance of $2,000; gain to James of $3,000.
C)Deductible loss to Lance of $2,000; gain to James of $3,000.
D)Disallowed loss to Lance of $2,000; gain to James of $1,000.
E)None of the above.
Q2) The legal cost of having a will prepared is not deductible.
A)True
B)False
Q3) Which of the following is not deductible?
A)Moving expenses in excess of reimbursement.
B)Tax return preparation fees of an individual.
C)Expenses incurred associated with investments in stocks and bonds.
D)Allowable hobby expenses in excess of hobby income.
E)None of the above.
Q4) Briefly discuss the two tests that an accrual basis taxpayer must apply before an expense can be deducted.
Page 8
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) When a nonbusiness casualty loss is spread between two taxable years, the loss in the second year is reduced by 10% of adjusted gross income for the first year.
A)True
B)False
Q2) If a business debt previously deducted as partially worthless becomes totally worthless this year, only the amount not previously deducted can be deducted this year. A)True
B)False
Q3) Al, who is single, has a gain of $40,000 on the sale of §1244 stock (small business stock) and a loss of $80,000 on the sale of § 1244 stock.As a result, Al has a $40,000 ordinary loss.
A)True
B)False
Q4) How is qualified production activities income (QPAI) calculated?
Q5) An unreimbursed employee business expense can create an NOL for an individual. A)True B)False
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Q6) Why was the domestic production activities deduction (DPAD) enacted by Congress?
Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Q1) On February 20, 2012, Susan paid $200,000 for a qualified leasehold improvement to an office building that she is going to lease to John.The lease will begin on June 1, 2012, and terminate on May 31, 2022.At the termination of the lease, the improvement will be worthless.Susan did not elect to treat the leasehold improvement property as § 179 property.She does not take additional first-year depreciation. Determine Susan's deductible loss as a result of the termination of the lease.
A)$0.
B)$123,503.
C)$127,990.
D)$128,631.
E)None of the above.
Q2) Discuss the effect on the cost recovery method of a taxpayer election if the uniform capitalization rules apply to a farming business.
Q3) The concept of depreciation assumes that the asset has a determinable useful life.
A)True
B)False
Q4) Discuss the reason for the inclusion amount with respect to leased automobiles.
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) After graduating from college with a degree in chemistry, Alberto obtains a job as a chemist with DuPont.Alberto's job search expenses qualify as deductions.
A)True
B)False
Q2) Dove Corporation pays for a trip to Jamaica for its two top salespersons.This expense is not subject to the cutback adjustment.
A)True
B)False
Q3) A participant who is at least age 59 1/2 can make a tax-free qualified withdrawal from a Roth IRA after a five-year holding period.
A)True
B)False
Q4) Statutory employees:
A) Report their expenses on Schedule C.
B) Include common law employees.
C) Are subject to income tax withholdings.
D) Claim their expenses as deductions from AGI.
E) None of the above.
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) Judy paid $40 for Girl Scout cookies and $40 for Boy Scout popcorn.Judy may claim an $80 charitable contribution deduction.
A)True
B)False
Q2) In 2012, Dena traveled 545 miles for specialized medical treatment that was not available in her hometown. She paid $80 for meals during the trip, $125 for a hotel room on Tuesday night, and $15 in parking fees. She did not keep records of other out-of-pocket costs for transportation. Dena can include $270 in computing her medical expenses.
A)True
B)False
Q3) Gerald, a physically handicapped individual, pays $9,000 for the installation of wheelchair ramps, support bars, and railings in his personal residence.These improvements increase the value of his personal residence by $2,000.Only $7,000 of the expenditure qualifies as a medical deduction (subject to the 7.5% floor).
A)True
B)False
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Chapter 11: Investor Losses
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Q1) When determining whether an individual is a material participant, participation by an owner's spouse generally counts.
A)True
B)False
Q2) Gray Company, a closely held C corporation, incurs a $50,000 loss on a passive activity during the year.The company has active income of $34,000 and portfolio income of $24,000.If Gray is not a personal service corporation, it may deduct $34,000 of the passive loss.
A)True
B)False
Q3) Jack owns a 10% interest in a partnership (not real estate) in which his at-risk amount is $42,000 at the beginning of the year.During the year, the partnership borrows $80,000 on a nonrecourse note and incurs a loss of $60,000 from operations.Jack's at-risk amount at the end of the year is $44,000.
A)True
B)False
Q4) What special passive loss treatment is available to real estate activities?
Q5) Describe the general rules that limit the deduction of investment interest expense.
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Chapter 12: Tax Credits and Payments
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Q1) An employer's tax deduction for wages is not affected by the work opportunity tax credit.
A)True B)False
Q2) The maximum credit for child and dependent care expenses is $2,100 if only one spouse is employed and the other spouse is a full-time student.
A)True B)False
Q3) Susan generated $55,000 of net earnings from the conduct of a tax preparation business that she operated during the tax-filing season.She also received wages of $60,000 from her full-time job.Compute the self-employment taxes due for 2012.
Q4) The tax benefits resulting from tax credits and tax deductions are never affected by the tax rate bracket of the taxpayer.
A)True
B)False
Q5) Only self-employed individuals are required to make estimated tax payments.
A)True
B)False
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Chapter 13: Property Transactions: Determination of Gain or
Loss, Basis Considerations, and Nontaxable
Exchanges-Part 1
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Q1) Elvis owns all of the stock of Shadow Corporation.The accumulated earnings and profits of Shadow Corporation at the end of the year are a deficit of $12,000.The current earnings and profits are $25,000.Elvis' basis for his stock is $290,000.He receives a distribution of $340,000 on the last day of the tax year.How much dividend income and/or capital gain should Elvis report?
A)$0.
B)Dividend income of $13,000 and capital gain of $37,000.
C)Dividend income of $25,000 and capital gain of $25,000.
D)Dividend income of $0 and capital gain of $50,000.
E)None of the above.
Q2) 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
Q3) The basis of property received by gift is always a carryover basis.
A)True
B)False
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Chapter 13: Property Transactions: Determination of Gain or
Loss, Basis Considerations, and Nontaxable
Exchanges-Part 2
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Q1) What is a deathbed gift and what tax consequences apply?
Q2) For a corporate distribution of cash or other property to a shareholder, when does dividend income or a return of capital result?
Q3) Janet, age 68, sells her principal residence for $500,000.She purchased it twenty-two years ago for $150,000.Selling expenses are $30,000 and repair expenses to get the house in a marketable condition to sell are $15,000.Janet's objective is to minimize the taxes she must pay associated with the sale.Calculate her recognized gain.
Q4) On January 5, 2012, Waldo sells his principal residence with an adjusted basis of $270,000 for $690,000.He has owned and occupied the residence for 15 years.He pays $35,000 in commissions and $2,000 in legal fees in connection with the sale.One month before the sale, Waldo painted the exterior of the house at a cost of $5,000 and repaired various items at a cost of $3,000.On October 15, 2012, Waldo purchases a new home for $600,000.On November 15, 2013, he pays $25,000 for completion of a new room on the house, and on January 14, 2014, he pays $15,000 for the construction of a pool.What is the Waldo's recognized gain on the sale of his old principal residence and what is the basis for the new residence?
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Q5) What effect does a deductible casualty loss have on the adjusted basis of property?
Chapter 14: Property Transactions: Capital Gains and Losses,
1231, Recapture Provisions
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Q1) If § 1231 asset casualty gains and losses net to a gain, the gain is treated as a § 1231 gain.
A)True
B)False
Q2) Short-term capital gain is eligible for a special tax rate only when it exceeds long-term capital gain.
A)True
B)False
Q3) For § 1245 recapture to apply, accelerated depreciation must have been taken on the property.
A)True
B)False
Q4) Section 1231 lookback losses may convert some or all of § 1250 gain into ordinary income.
A)True
B)False
Q5) Personal use property casualty gains and losses are not subject to the § 1231 rules.
A)True
B)False
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Chapter 15: Alternative Minimum Tax
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Q1) For regular income tax purposes, Yolanda, who is single, is in the 35% tax bracket.Her AMT base is $220,000.Her tentative AMT is:
A)$57,200.
B)$58,100.
C)$61,600.
D)$77,000.
E)None of the above.
Q2) If the regular income tax deduction for medical expenses is $0, under certain circumstances the AMT deduction for medical expenses can be greater than $0.
A)True
B)False
Q3) Tammy expensed mining exploration and development costs of $100,000 incurred in 2012.She will be required to make negative AMT adjustments for each of the next nine years and a positive AMT adjustment in the current tax year.
A)True
B)False
Q4) Will all AMT adjustments reverse? That is, do they relate to timing differences?
Q5) Under what circumstances are corporations exempt from the AMT?
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Chapter 16: Accounting Periods and Methods
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Q1) Pink Corporation is an accrual basis taxpayer that uses the recurring item exception to the economic performance test for all relevant years.For 2012, the corporation's income subject to state income tax was $500,000 and the state corporate tax rate was 6%.During 2012, the corporation paid $24,000 on its estimated state income tax liability for that year.The remaining $6,000 of 2012 state income tax was paid in April 2013.In June 2012, the corporation paid $9,000 on its year 2011 state income tax liability, as a result of an audit of the 2011 return that was conducted in 2012. The company has elected to use the recurring item exception to economic performance. As a result of the above, the corporation should deduct in 2012 on its Federal income tax return state income taxes of:
A)$24,000.
B)$30,000.
C)$33,000.
D)$39,000.
E)None of the above.
Q2) A C corporation's selection of a tax year, generally, is independent of the tax year of its principal shareholders.
A)True
B)False
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Chapter 17: Corporations: Introduction and Operating Rules
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Q1) Canary Corporation, which sustained a $5,000 net capital loss during the year, will enter $5,000 as a addition item on Schedule M-1.
A)True
B)False
Q2) No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days.
A)True
B)False
Q3) Which of the following statements is incorrect regarding the taxation of C corporations?
A)Similar to those applicable to individuals, the marginal tax rate brackets for corporations are adjusted for inflation.
B)Taxable income of a personal service corporation is taxed at a flat rate of 35%.
C)A tax return must be filed whether or not the corporation has taxable income.
D)The highest corporate marginal tax rate is 39%.
E)None of the above.
Q4) Explain the rules regarding the accounting periods available to corporate taxpayers.
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Chapter 18: Corporations: Organization and Capital Structure
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Q1) If both §§ 357(b) and (c) apply to the same transfer (i.e., the liability is not supported by a bona fide business purpose and also exceeds the basis of the properties transferred), § 357(c) predominates.
A)True
B)False
Q2) Three individuals form Skylark Corporation with the following contributions: Cliff, cash of $50,000 for 50 shares; Brad, land worth $20,000 (basis of $11,000) for 20 shares; and Ron, cattle worth $9,000 (basis of $6,000) for 9 shares and services worth $21,000 for 21 shares.
A)These transfers are fully taxable and not subject to § 351.
B)Ron's basis in his stock is $27,000.
C)Ron's basis in his stock is $6,000.
D)Brad's basis in his stock is $20,000.
E)None of the above.
Q3) In structuring the capitalization of a corporation, the tax law is neutral for the investor as to debt versus equity financing.
A)True
B)False
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Chapter 19: Corporations: Distributions Not in Complete
Liquidation
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Q1) Glenda is the sole shareholder of Condor Corporation.She sold her stock to Melissa on October 31 for $150,000.Glenda's basis in Condor stock was $50,000 at the start of the year.Condor distributed land to Glenda immediately before the sale.Condor's basis in the land was $20,000 (fair market value of $25,000).On December 31, Melissa received a $75,000 cash distribution from Condor.During the year, Condor has $20,000 of current E & P and its accumulated E & P balance on January 1 is $10,000.Which of the following statements is true?
A)Glenda recognizes a $110,000 gain on the sale of her stock.
B)Glenda recognizes a $100,000 gain on the sale of her stock.
C)Melissa receives $5,000 of dividend income.
D)Glenda receives $20,000 of dividend income.
E)None of the above.
Q2) Sally and her mother are the sole shareholders of Owl Corporation. During the current year, Owl distributes cash in redemption of all of Sally's stock. Sally continues to be employed as controller for Owl after the redemption. The distribution is a complete termination redemption resulting in sale or exchange treatment for Sally.
A)True
B)False
Q3) When is a redemption to pay death taxes under § 303 most advantageous?
Page 22
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) Noncorporate shareholders may elect out of § 368 and recognize losses when property subject to a liability is distributed to them in a corporate reorganization.
A)True
B)False
Q2) The Federal income tax treatment of a corporate restructuring is an extension of allowing entities to form without taxation.
A)True
B)False
Q3) There are several different types of corporate reorganizations allowed by the Internal Revenue Code.Provide a brief description of each type.
Q4) The gains shareholders recognize as a part of a corporate reorganization may be treated a dividend to the extent of the corporation's E & P.
A)True
B)False
Q5) What are the tax consequences of a § 332 liquidation to the parent corporation, subsidiary corporation, and minority shareholder?
Q6) Discuss the role of letter rulings in corporate reorganizations.
Page 23
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Chapter 21: Partnerships
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Q1) Laura is a real estate developer and owns property that is treated as inventory (not a capital asset) in her business.She contributes a parcel of this land (basis of $15,000) to a partnership, also to be held as inventory.The fair market value of the property is $12,000 at the contribution date.After three years, the partnership sells the land for $10,000.The partnership will recognize a $5,000 ordinary loss on sale of the property.
A)True
B)False
Q2) Crystal contributes land to the newly formed CD Partnership in exchange for a 40% interest.The land has an adjusted basis and fair market value of $200,000 and is subject to a liability of $50,000, which the partnership assumes.None of this liability is repaid at year-end.At the end of the year, the partnership has trade accounts payable of $60,000.Assume all liabilities are allocated proportionately to the partners.Total partnership income for the year is $300,000.What is Crystal's basis in her partnership interest at the end of the year?
Q3) A partnership is an association formed by two or more taxpayers (who must be individuals) to carry on a trade or business.
A)True
B)False
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Chapter 22: S: Corporations
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Q1) Claude Bergeron sold 1,000 shares of Ditta, Inc., an S corporation, for $12,000.He had owned the stock for three years and had a stock basis of $111,000 in the shares.Claude is single, and he is the original owner of the § 1244 stock shares.Calculate the appropriate tax treatment.
A)No gain or loss.
B)$50,000 LTCL; $49,000 ordinary deduction.
C)$50,000 ordinary deduction; $49,000 LTCL.
D)$99,000 long-term capital loss.
Q2) S corporation status provides many of the benefits of
taxation and at the same time gives the owner
____________________ protection from creditors. or
Q3) ____________________ common stock and
preferred stock (with preference on dividends) are treated as two different classes of stock by the S corporation rules.
Q4) Discuss the two methods of allocating tax-related items to S corporation shareholders.
Q5) List some of the separately stated items listed on Schedule K of the Form 1120S.
Q6) An S corporation may not have a ____________________ alien shareholder.
Page 25
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Chapter 23: Exempt Entities
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Q1) The income from a bingo game or a casino game conducted by an exempt organization may be unrelated business income.
A)True
B)False
Q2) Loyal, Inc., is a §501(c)(3) organization that is not classified as a private foundation.During the current year, it is subject to intermediate sanctions.What other options does the IRS have in dealing with an exempt organization engaging in prohibited transactions?
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) Define a qualified corporate sponsorship payment.
Q5) Medical, Inc., a § 501(c)(3) exempt organization, engages in an excess benefit transaction.The amount of the excess benefit is $200,000.For the organization management, the participation in the excess benefit transaction was not willful and was due to reasonable cause.Calculate the amount of the excise tax (first-level tax) imposed under the intermediate sanctions provision.
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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) For most taxpayers, which of the traditional apportionment factors yields the greatest opportunities for tax reduction?
A)Payroll.
B)Property.
C)Sales (gross receipts).
D)Unitary.
Q3) In unitary states, a(n) ____________________ provision permits a multinational corporation to elect to limit the reach of the state's taxing jurisdiction to activities occurring within the boundaries of the United States.
Q4) In international taxation, we discuss income sourcing rules and the permanent establishment doctrine. In multistate taxation, an analogous term might be the "ultimate destination concept." Define this term, and identify at least two of the most important exceptions to the general rule.
Q5) 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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Sample Questions
Q1) When a business taxpayer "goes international," the first step usually is to create an overseas branch sales office.
A)True B)False
Q2) The "residence of seller" rule is used in determining the sourcing of all gross income and deductions of a U.S.multinational business.
A)True B)False
Q3) Jilt, a non-U.S.corporation, not resident in a treaty country, operates a U.S.branch that earns effectively connected E & P of $4 million for the tax year. The branch increases its investments in U.S.property (its U.S.net equity) by $1,600,000.The branch pays a U.S.corporate income tax of $2,153,846.Jilt's branch profits tax is:
A)$720,000.
B)$1,200,000.
C)$2,153,846.
D)$2,873,846.
Q4) Describe and diagram the timeline that most businesses use to enter the international markets.
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Chapter 26: Tax Practice and Ethics
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Q1) Certain individuals are more likely than others to have the Form 1040 audited by the IRS. List at least five factors that may increase above the national norms one's chances of audit.
Q2) Mickey, a calendar year taxpayer, was not required to file a 2011 Federal income tax return because his AGI was negative due to business losses.During 2012, his AGI is $120,000 and his tax liability is $10,000.To avoid a penalty for tax underpayments for 2012, Mickey must make aggregate estimated tax payments of at least:
A)$10,000.
B)$9,000.
C)$1,000 (minimum amount).
D)$0.
Q3) Michelle, a calendar year taxpayer subject to a 30% marginal income tax rate, claimed a Form 1040 charitable contribution deduction of $275,000 for a sculpture that the IRS later valued at $200,000.The applicable overvaluation penalty is:
A)$0.
B)$4,500.
C)$9,000.
D)$22,500.
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Chapter 28: Income Taxation of Trusts and Estates
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Q1) The Drabb Trust owns a plot of business-related land, basis of $50,000, fair market value of $35,000.Drabb is subject to a 35% marginal income tax rate.Its sole beneficiary, Eddie, is subject to a 15% marginal income tax rate.Drabb's current-year distributable net income is $95,000.What is the most preferable action for the trustee of Drabb to take, considering only the related tax consequences?
A)Distribute the land to Eddie and make a § 643(e) election.
B)Distribute the land to Eddie and make no § 643(e) election.
C)Sell the land to a third party.
D)Neither sell nor distribute the land.
Q2) The tax rules regarding the income taxation of trusts and estates are included in which Subchapter of the Internal Revenue Code?
A)S.
B)K.
C)J.
D)C.
Q3) Generally, an estate's taxable income is computed in a manner similar to that used for a(n) ____________________.
Q4) The IRS encourages ____________________ filing for Forms 1041.
Q5) Every ____________________ trust is allowed a $300 personal exemption.
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