Investment and Taxation Exam Review
Course Introduction
This course explores the fundamental principles of investment and taxation, examining how tax considerations influence investment decisions and financial planning. Students will gain an understanding of various investment vehicles, portfolio strategies, and the impact of taxation on returns, including topics such as capital gains, dividends, tax-deferred accounts, and tax-efficient investing. The course also covers relevant tax laws, regulations, and planning strategies for both individuals and businesses, equipping students with the analytical tools needed to optimize investment outcomes within the context of the prevailing tax environment.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 2019 22nd Edition by Sally
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18 Chapters
1798 Verified Questions
1798 Flashcards
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Page 2
Jones
Chapter 1: Taxes and Taxing Jurisdictions
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90 Verified Questions
90 Flashcards
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Sample Questions
Q1) Which of the following is an example of a transaction-based tax?
A) A tax on net business income
B) An excise tax
C) An estate tax on the transfer of assets at death
D) Both an excise tax and an estate tax on the transfer of assets at death.
Answer: D
Q2) Which of the following statements concerning property taxes is false?
A) Property taxes are ad valorem taxes.
B) Property taxes are the primary source of revenue for local governments.
C) Property taxes can be levied on realty or personalty.
D) None of the above is false.
Answer: D
Q3) A tax with a graduated rate structure must have at least two brackets of tax base. A)True
B)False
Answer: True
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Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) The federal income tax law allows individuals whose property is destroyed by a natural disaster such as a fire or hurricane to reduce their taxable income by the amount of their financial loss. This rule is intended to improve the:
A) Convenience of the tax
B) Efficiency of the tax
C) Horizontal equity of the tax
D) Vertical equity of the tax
Answer: C
Q2) Which of the following statements about a regressive tax rate structure is false?
A) A regressive rate structure cannot result in vertical equity.
B) Regressive rates decrease as the tax base increases.
C) A regressive rate structure places a proportionally heavier tax burden on taxpayers with smaller tax bases than persons with greater tax bases.
D) None of the above is false.
Answer: A
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4
Chapter 3: Taxes as Transaction Costs
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Sample Questions
Q1) When the tax law applies differentially to transaction alternatives, decisions should focus on before-tax earnings.
A)True
B)False
Answer: False
Q2) A dollar available today is always worth more than a dollar not available until a future period.
A)True
B)False
Answer: True
Q3) Lenz has $100,000 in an investment paying 9% annual interest. Her marginal tax rate is 25%. Which of the following statements is false?
A) Ms. Lenz's annual before-tax cash flow from this investment is $9,000.
B) If the interest is tax-exempt, Ms. Lenz's annual after-tax cash flow is $9,000.
C) If the interest is taxable, Ms. Lenz's annual after-tax cash flow is $6,750.
D) None of the above is false.
Answer: D
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5
Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) The 15% preferential tax rate on capital gains has the same value to every individual taxpayer.
A)True
B)False
Q2) Nilo Inc. sold an asset to PPQ Partnership, which is unrelated to Nilo. PPQ immediately sold the property to Nilo Western Inc., which is a 100% controlled Nilo subsidiary. The IRS could treat the two sales as one sale of the asset by Nilo to Nilo Western by applying the:
A) Economic substance doctrine
B) Assignment of income doctrine
C) Step transaction doctrine
D) Constructive payment doctrine
Q3) Corporations, LLCs, and partnerships are all taxable entities.
A)True
B)False
Q4) Both the individual and the corporate federal income tax rates are progressive. A)True
B)False
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Chapter 5: Tax Research
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82 Flashcards
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Sample Questions
Q1) In circumstances requiring an evaluative judgment, the tax researcher can provide a definitive answer to the research question.
A)True
B)False
Q2) Based on the citation Rev. Rul. 89-157, 1989-1 C.B. 221:
A) This revenue ruling was issued in 1989.
B) This revenue ruling is no longer valid.
C) The abbreviation C.B. stands for Comprehensive Bulletin.
D) This revenue ruling appears on page 157.
Q3) A keyword search in an electronic tax service:
A) Allows the researcher to combine words and phrases to define the search.
B) Is identical to using the topical index in a paper service.
C) Is not an efficient way to conduct tax research.
D) Cannot be restricted to only a part or portion of the data base.
Q4) Which of the following is not one of the six steps in the tax research process?
A) Understand the client's transaction and ascertain the facts.
B) Locate relevant tax law authority.
C) Analyze relevant authority and answer the research questions.
D) All of the above are steps in the tax research process.
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Chapter 6: Taxable Income from Business Operations
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115 Verified Questions
115 Flashcards
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Sample Questions
Q1) A taxpayer that wants to change its taxable year from a fiscal year to a calendar year is not required to receive permission from the IRS to make the change.
A)True
B)False
Q2) A corporation can't have an increase in deferred tax assets and an increase in deferred tax liabilities in the same year.
A)True
B)False
Q3) Which of the following statements about the accrual method of accounting is false?
A) The accrual method is the required method of accounting under GAAP.
B) Every publicly held corporation must use the accrual method of accounting to prepare financial statements.
C) The accrual method of accounting under GAAP and the accrual method of accounting for computing taxable income are identical.
D) Corporations with more than $5 million average annual gross receipts are required to use the accrual method to compute taxable income.
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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115 Verified Questions
115 Flashcards
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Sample Questions
Q1) Conant Company purchased only one item of tangible personalty in 2018. The cost of the item was $2,539,700. Conant can elect to expense $1,000,000 of this cost.
A)True
B)False
Q2) Colby Company performed professional services for M&E Inc. In exchange for the services, M&E gave Colby a 12-month lease on commercial office space. M&E could have charged $4,350 monthly rent for the space on the open market. Compute Colby's tax basis in the lease.
A) The lease is an intangible asset and therefore has a zero basis to Colby.
B) The lease has a zero basis because Colby obtained the lease at no cost.
C) $52,200.
D) None of the above
Q3) The MACRS calculation ignores any salvage or residual value of an asset.
A)True
B)False
Q4) The expense of adapting an existing asset to a new or different use must be capitalized to the cost of the asset for tax purposes.
A)True
B)False
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Chapter 8: Property Dispositions
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122 Flashcards
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Sample Questions
Q1) In 2017, TPC Inc. sold investment land with a $388,000 book and tax basis for $523,000. The purchaser paid $60,000 in cash and gave TPC a note for the $463,000 balance of the price. In 2018, TPC received a $67,800 payment on the note ($40,000 principal + $27,800 interest). In 2018, TPC's use of the installment sale method results in a:
A) $10,325 favorable permanent book/tax difference
B) $17,496 unfavorable temporary difference
C) $17,496 favorable temporary difference
D) None of the above
Q2) Nilex Company sold three operating assets this year. Nilex recognized a $14,100 Section 1231 loss on the first sale, a $20,000 Section 1231 loss on the second sale, and a $19,600 Section 1231 gain on the third sale. Which of the following statements is true?
A) Nilex can deduct its $14,500 net Section 1231 loss.
B) Nilex can deduct its $34,100 net Section 1231 loss and can treat its $19,600 Section 1231 gain as a capital gain.
C) Nilex must treat its $14,500 net Section 1231 loss as a capital loss.
D) None of the above statements is true.
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Chapter 9: Nontaxable Exchanges
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105 Verified Questions
105 Flashcards
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Sample Questions
Q1) Qualifying property received in a nontaxable exchange has a cost basis for tax purposes.
A)True
B)False
Q2) Mrs Cooley exchanged 400 shares of stock for corporate bonds. If the stock and bonds were issued by the same corporation, they are like-kind properties, and the exchange is nontaxable.
A)True
B)False
Q3) Tibco Inc. exchanged an equity interest in ABM Partnership for an equity interest in Jolla Partnership. This exchange is taxable.
A)True
B)False
Q4) A taxpayer who receives boot in a nontaxable exchange must recognize gain equal to the lesser of the FMV of the boot or the gain realized.
A)True
B)False
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11
Chapter 10: Sole Proprietorships
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Sample Questions
Q1) If a business is formed as an S corporation, its income may be subject to double taxation.
A)True
B)False
Q2) Which of the following statements regarding limited liability companies is true?
A) Just like an S corporation, an LLC member's share of ordinary income is not subject to self-employment taxes.
B) Just like an S corporation, an LLC is restricted to 100 members.
C) Because LLCs are a relatively new organizational form, many tax questions concerning their operation have yet to be resolved.
D) Just like a limited partnership, only LLC members who are not actively involved in the entity's business activities have limited liability for the LLC's debts.
Q3) Which of the following statements regarding sole proprietorships is false?
A) A sole proprietorship has no legal identity separate from that of its owner.
B) Sole proprietorships are the most common form of business entity in the U.S.
C) The cash flow generated by a sole proprietorship belongs to the owner.
D) The assets and liabilities of a sole proprietorship are held in the name of the business, not the owner.
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Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) Corporations are allowed a deduction for charitable contributions, limited to 10 percent of taxable income before the deduction.
A)True B)False
Q2) After 2017, a 1.4% excise tax applies to the net investment income of all colleges and universities.
A)True B)False
Q3) Corporation F owns 95 percent of the outstanding stock of Corporation G. This year, the corporations' records provide the following information:
a. Compute each corporation's taxable income if they file separate tax returns.
b. Compute consolidated taxable income if Corporation F and Corporation G file a consolidated tax return.
Q4) In terms of dispersal of ownership, corporations are classified as either closely held or publicly held.
A)True B)False
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13
Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) Betsy Williams is the sole shareholder of Kurt Corporation. She also owns the office building that serves as corporate headquarters for Kurt. Last year, Kurt paid $200,000 annual rent to Betsy for use of the building. Kurt's marginal tax rate was 21 percent and Betsy's marginal tax rate was 37 percent. The revenue agent who audited Kurt's return concluded that the fair rental value of the office building was $140,000.
a. What effect does this conclusion have on Betsy's personal income tax liability?
b. What effect does this conclusion have on Kurt's corporate income tax liability?
Q2) Family partnerships attempt to divide the income of a business among family members in order to decrease the overall tax burden of the family unit.
A)True B)False
Q3) The personal holding company tax is a penalty tax imposed in addition to the regular income tax.
A)True
B)False
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14
Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) The UDITPA formula for apportioning income among states is based on four equally weighted factors.
A)True
B)False
Q2) Cambridge, Inc. conducts business in states X and Y. This year, its before-tax income was $150,000. Below is information regarding its sales, payroll, and property factors in both states.
Both states apply an equally-weighted three-factor formula to apportion income. State X has a 10% corporate income tax and state Y has a 5% corporate income tax. Compute the state tax savings if Cambridge could relocate $100,000 of property and $50,000 of payroll from state X to state Y.
A) $2,250
B) $12,563
C) $11,532
D) $9,094
Q3) Non-resident firms selling tangible goods to in-state residents can use P.L. 86-272 to avoid having income tax nexus in a state.
A)True
B)False
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Page 15
Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Kilo is an unmarried individual. She has $219,344 taxable income in 2018. Compute Ms. Kilo's regular tax liability if she files as a single taxpayer and if she files as a surviving spouse.
A) Single $52,460; surviving spouse $61,924
B) Single $55,990; surviving spouse $42,222
C) Single $43,896; surviving spouse $52,460
D) None of the above
Q2) An individual who files his own tax return but is claimed as a dependent on another individual's return is not allowed any standard deduction.
A)True
B)False
Q3) Mr and Mrs Kline file a joint return on which they claim the standard deduction. If the taxable income on their return is $35,000, they are not paying a marriage penalty.
A)True
B)False
Q4) The Section 199A deduction always has the impact of lowering AGI.
A)True
B)False
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Page 16
Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) On June 30, 2015, Gruen Inc. issued 2,000 shares of its publicly traded stock as compensation to its employee, Stu Barnes. On date of issuance, the stock's fair market value was $13,500. Under the terms of his 2015 compensation contract, Mr Barnes couldn't dispose of the stock before January 1, 2019, and if he terminated his employment with Gruen before that date, he had to forfeit the stock back to Gruen. Mr Barnes made no election with respect to the restricted stock in 2015. On January 2, 2019, Mr Barnes, who was still a Gruen employee, sold all 2,000 shares for $47,500. What are the 2019 tax consequences to Mr Barnes?
A) He recognizes $47,500 ordinary income and zero capital gain on sale of the stock.
B) He recognizes zero ordinary income and $47,500 capital gain on sale of the stock.
C) He recognizes zero ordinary income and $13,500 capital gain on sale of the stock.
D) He recognizes $34,000 ordinary income and $13,500 capital gain in sale of the stock.
Q2) Qualified withdrawals from both traditional and Roth IRAs are tax-exempt.
A)True
B)False
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Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) The interest earned on investments in U.S. debt obligations is subject to state taxation.
A)True B)False
Q2) A beneficiary's basis of inherited property equals the decedent's adjusted basis immediately prior to death.
A)True B)False
Q3) At the beginning of the year, Calvin paid $5,000 for 60 shares of Eddington stock. In June, he received a $300 cash distribution with respect to the stock. His Form 1099-DIV reported that $170 was an ordinary dividend and $130 was nontaxable. Compute Calvin's tax basis in his 60 shares at year-end.
A) $4,870
B) $4,700
C) $4,830
D) $5,000
Q4) Gift tax is based on the donor's adjusted tax basis in the transferred property.
A)True B)False
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Chapter 17: Tax Consequences of Personal Activities
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Sample Questions
Q1) Which of the following is not a tax incentive for individuals to purchase a home instead of renting?
A) Real property taxes on the home are deductible.
B) Premiums paid on homeowner's insurance are deductible.
C) Interest paid on a home mortgage is deductible.
D) All of the above are tax incentives.
Q2) Mr and Mrs Perry own three homes, each of which is subject to a mortgage incurred to purchase the home. The mortgage on their principal residence is $290,000, the mortgage on the second home is $100,000, and the mortgage on the third home is $317,000. Which of the following statements is true?
A) Mr. and Mrs Perry are allowed an itemized deduction for the interest paid on all three mortgages.
B) The Perrys' itemized deduction is limited to the interest on the $290,000 mortgage.
C) The Perrys' itemized deduction is limited to the interest on the $317,000 mortgage.
D) None of the statements is true.
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19
Chapter 18: The Tax Compliance Process
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Sample Questions
Q1) Mrs Claire underpaid her current-year federal income tax by $11,017. If the entire underpayment was attributable to Mrs Claire's failure to make a good faith effort to comply with the tax law, the IRS may impose a $2,754 negligence penalty.
A)True
B)False
Q2) Mr and Mrs Lester failed to report a $40,540 capital gain on their 2017 Form 1040. The gross income reported on the return was $169,404, and the return was filed on January 20, 2018. What is the last date on which the IRS can assess additional tax for 2017?
Q3) A professional tax return preparer must attach his or her signature and identifying number to each return prepared.
A)True B)False
Q4) A person can't be relieved of liability for a tax deficiency under the innocent spouse rule if that person enjoyed significant financial benefit from taxable income omitted from the return.
A)True B)False
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