Investment and Taxation Test Questions
Course Introduction
This course provides an in-depth exploration of the principles and strategies underpinning investment decisions and their associated tax implications. Students will learn to analyze various investment vehicles including stocks, bonds, mutual funds, and real estate in the context of local and international tax regulations. The curriculum covers topics such as tax-efficient investing, capital gains taxation, the impact of tax policy changes, and legal methods to minimize tax liability. Real-world case studies and practical exercises help students develop the skills necessary to maximize returns through informed investment choices while remaining compliant with relevant tax laws.
Recommended Textbook Principles of Taxation for Business and Investment Planning 2019 22nd Edition by Sally Jones
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Chapter 1: Taxes and Taxing Jurisdictions
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Sample Questions
Q1) Which of the following taxes is a significant source of revenue for state governments?
A) General sales tax
B) Individual income tax
C) Corporate income tax
D) All of the above
Answer: D
Q2) The state of Virginia charges motorists 50 cents for every trip across a toll bridge over the James River. This charge is an example of a(n):
A) User's fee
B) Transaction-based tax
C) Activity-based tax
D) Excise tax
Answer: A
Q3) Which type of tax is not levied by the federal government?
A) Corporate income tax
B) Individual income tax
C) Employment taxes
D) General sales tax
Answer: D
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Chapter 2: Policy Standards for a Good Tax
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Q1) Which of the following statements about a progressive tax rate structure is false?
A) Progressive rates increase as the tax base increases.
B) Progressive rates reflect the theory of the declining marginal utility of income.
C) The federal income tax has always used a progressive rate structure.
D) Progressive rates result in greater vertical equity than a proportionate rate.
Answer: D
Q2) The government of Nation C operated at a $32 billion deficit this year. The deficit suggests that Nation C's tax system is:
A) Inefficient
B) Insufficient
C) Unfair
D) Inconvenient
Answer: B
Q3) A tax should result in either horizontal or vertical equity across taxpayers.
A)True
B)False
Answer: False
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Chapter 3: Taxes as Transaction Costs
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Sample Questions
Q1) Which of the following statements about public market transactions is true?
A) The parties negotiate directly with each other.
B) The parties must engage in unilateral instead of bilateral tax planning.
C) The parties are not transacting at arm's length.
D) Both parties have flexibility in determining the legal and financial characteristics of the transaction.
Answer: B
Q2) Zazu Company is considering modifying a transaction to reduce the current year tax cost by $50,000. Which of the following statements is false?
A) The modification will increase the NPV of the transaction by $50,000.
B) The modification may affect the transaction's before-tax cash flows.
C) The modification may reduce the tax cost but increase one or more nontax costs.
D) The modification may not be desirable even though it reduces the tax cost.
Answer: A
Q3) The tax law prohibits related party transactions.
A)True
B)False
Answer: False
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Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) OWB Inc. and Owin Inc. are owned by the same family. OWB's marginal tax rate is 30%, and Owin's marginal tax rate is 21%. OWB has the opportunity to engage in a transaction that will generate $250,000 taxable cash flow. Alternatively, Owin could engage in the transaction. However, Owin would incur an extra $60,000 deductible cash expense with respect to the transaction. Which of the following statements is true?
A) Because OWB and Owin are owned by the same family, the family is indifferent as to which corporation engages in the transaction.
B) OWB should engage in the transaction to generate $24,900 more after-tax cash flow.
C) OWB should engage in the transaction to avoid the extra expense.
D) Owin should engage in the transaction because it has the lower marginal tax rate.
Q2) The tax character of an item of income depends on how the income is reported on the firm's financial statements.
A)True
B)False
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Chapter 5: Tax Research
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Sample Questions
Q1) Professional tax research conclusions should always be based on relevant secondary authority.
A)True
B)False
Q2) Which of the following is not primary authority on which to base tax research conclusions?
A) U.S. District Court decision
B) Editorial in the Wall Street Journal
C) U.S. Court of Federal Claims decision
D) Revenue procedure
Q3) Treasury regulations are considered statutory authority.
A)True
B)False
Q4) Step 4 of the tax research process is to repeat steps 1 through 3 as many times as necessary.
A)True
B)False
Q5) Revenue procedures are a type of secondary authority.
A)True
B)False
Page 7
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Chapter 6: Taxable Income from Business Operations
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Sample Questions
Q1) On December 19, 2018, Acme Inc., an accrual basis corporation, accrued $50,000 compensation expense for a routine year-end bonus payable to Mrs Tabor, who is Acme's CFO. Acme paid the $50,000 to Mrs Tabor on January 15, 2019. Which of the following statements is false?
A) If Mrs Tabor owns no stock in Acme (i.e. is not a related party), Acme can deduct the accrued expense in 2018.
B) Mrs Tabor includes her $50,000 bonus in 2019 gross income.
C) If Mrs Tabor owns 75 percent of Acme's stock (i.e. is a related party), Acme can't deduct the expense until 2019.
D) If Mrs Tabor owns 75 percent of Acme's stock (i.e. is a related party), Acme can never deduct the bonus expense.
Q2) A cash basis taxpayer must account for any prepayment of interest expense under the accrual method.
A)True
B)False
Q3) Taxable income is defined as gross income minus allowable deductions and credits.
A)True
B)False
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Page 8
Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) A basic premise of federal income tax law is that an expense is deductible unless the Internal Revenue Code specifically prohibits the deduction.
A)True
B)False
Q2) Cosmo Inc. paid $15,000 plus $825 sales tax plus a $200 delivery charge for a new business asset. Cosmo's tax basis in the asset is $15,200, and it can deduct the sales tax.
A)True
B)False
Q3) The capitalized cost of tangible leasehold improvements is amortizable over the term of the lease.
A)True
B)False
Q4) A book/tax difference resulting from application of the unicap rules to manufactured inventory reverses in the year in which the inventory is sold.
A)True
B)False
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Page 9
Chapter 8: Property Dispositions
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Sample Questions
Q1) This year, Ms. Lucas sold investment land for $125,000 cash plus the purchaser's assumption of a $50,000 mortgage on the land. Ms. Lucas's tax basis in the land was $93,000. If any recognized gain is taxed at 15 percent, compute the after-tax cash flow from the sale.
A) $62,300
B) $69,700
C) $112,700
D) $162,700
Q2) Winslow Company sold investment land to an unrelated purchaser. The purchaser paid $250,000 cash, assumed Winslow's $600,000 mortgage on the land, and gave Winslow its $580,000 ten-year, interest-bearing note. Compute Winslow's amount realized on sale.
A) $250,000
B) $830,000
C) $850,000
D) $1,430,000
Q3) The installment sale method of accounting is not applicable to realized losses.
A)True
B)False
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Page 10
Chapter 9: Nontaxable Exchanges
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Sample Questions
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) When unrelated parties agree to an exchange of noncash properties, the economic presumption is that the properties are of equal value.
A)True
B)False
Q3) Bill contributed business realty ($375,000 FMV and $113,000 adjusted basis) to Zeta Inc. in exchange for Zeta common stock. Immediately after the exchange, Bill owned 53% of Zeta's outstanding stock. Compute gain recognized by Bill and by Zeta on this exchange.
A) Bill $0; Zeta $0
B) Bill $262,000; Zeta $0
C) Bill $262,000; Zeta $375,000
D) Bill $0; Zeta $375,000
Q4) Tax neutrality for asset exchanges is the exception rather than the rule.
A)True
B)False
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Chapter 10: Sole Proprietorships
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Sample Questions
Q1) Armond earned $10,000 of profit from a sole proprietorship in 2018. If he also has $140,000 of salary income, how much self-employment tax will he owe?
A) $1,530
B) $1,413
C) $290
D) $268
Q2) Partners receiving guaranteed payments are not required to pay self-employment tax on such payments.
A)True
B)False
Q3) William is a member of an LLC. His Schedule K-1 reported a $1,200 share of capital loss and a $3,000 share of Section 1231 gain. William recognized a $4,500 capital gain on the sale of marketable securities and a $15,000 Section 1231 loss on the sale of business equipment. What is the net effect of these gains and losses on William's taxable income?
A) $3,300 net capital gain; $12,000 deductible net Section 1231 loss
B) $4,500 net capital gain; $12,000 deductible net Section 1231 loss
C) $4,500 net capital gain; $15,000 deductible net Section 1231 loss
D) $3,300 net capital gain; -0- deductible net Section 1231 loss
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Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) Most tax credits for which a corporate taxpayer would be eligible are nonrefundable.
A)True
B)False
Q2) Harmon, Inc. was incorporated and began business on January 1, 2017. Its tax liability for 2017 was $36,000. Its tax liability for 2018 was $50,000. Which of the following is a correct statement concerning the payment of estimated taxes for 2018?
A) Harmon must pay $12,500 on the 15th day of April, June, September, and December.
B) Harmon must pay $9,000 on the 15th day of April, June, September and December. The $14,000 balance is payable by April 15, 2019.
C) Harmon may pay the $50,000 tax no later than April 15, 2019.
D) None of the above statements is correct.
Q3) Generally, the corporate income tax is computed using a regressive rate schedule.
A)True B)False
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Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) A family partnership can be used to shift a portion of the income from an accounting practice to a taxpayer's young children.
A)True
B)False
Q2) A partner in a limited liability partnership (LLP) is protected from malpractice-related claims arising from the professional misconduct/negligence of another partner.
A)True
B)False
Q3) After-tax cash flow from a passthrough entity will always exceed after-tax cash flow from a taxable corporation.
A)True
B)False
Q4) A family partnership can be used to shift a portion of the income from a capital-intensive manufacturing business to a taxpayer's young children.
A)True B)False
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Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) Which of the following statements concerning the nexus required for a state to tax income is false?
A) Maryland has nexus if the corporate headquarters is located in Baltimore.
B) Company-owned trucks driving through Arizona to deliver goods to customers residing in California creates nexus in Arizona.
C) Maine has nexus if a company has retail outlets located in Maine malls.
D) A New York corporation can send traveling salespeople into Massachusetts to solicit orders for tangible goods without creating nexus in Massachusetts.
Q2) A foreign source dividend received by a U.S. corporation after 2017 is eligible for the 50% dividends-received deduction.
A)True
B)False
Q3) For dividends received prior to 2018, the deemed paid foreign tax credit was available only to U.S. corporations that own 30% or more of the voting stock of a foreign corporation that paid dividends during the taxable year.
A)True
B)False
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Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Julie, an unmarried individual, lives in a home with her 13-year-old dependent son, Oscar. This year, Julie had the following tax information. Standard Deduction Table.
Salary $ 95,000
Interest and dividend income 12,800
Capital gain from sale of investments 11,000
Above-the-line deductions 800
Itemized deductions 6,900
Compute Julie's adjusted gross income (AGI) and taxable income.
A) AGI $118,000; taxable income $97,800
B) AGI $118,000; taxable income $90,900
C) AGI $118,000; taxable income $100,000
D) AGI $107,000; taxable income $88,700
Q2) The unextended due date for the individual tax return (Form 1040) is the 15th day of the third month following the close of the taxable year.
A)True
B)False
Q3) 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) A cafeteria plan allows employees to select between a variety of nontaxable fringe benefits or taxable cash compensation.
A)True
B)False
Q2) Reimbursed employment-related business expenses have no net effect on the employee's taxable income.
A)True B)False
Q3) A stock option is the right to purchase the stock of a corporate employer at a stated price for an indefinite period of time.
A)True
B)False
Q4) Profit-sharing plans and employee stock ownership plans are examples of defined-benefit plans.
A)True B)False
Q5) Both traditional IRAs and Roth IRAs are tax-exempt accounts.
A)True B)False
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Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) Lana owns 50 shares of stock qualifying as Section 1244 stock. If she sells the stock to George, he can also treat the stock as Section 1244 stock.
A)True
B)False
Q2) Material participation in a business means that the individual is involved in the day-to-day operations on a regular, continuous, and substantial basis.
A)True
B)False
Q3) Six years ago, Mr Ahmed loaned $10,000 to a neighbor in exchange for an interest-bearing debt obligation. This year, the neighbor informed Mr Ahmed that he was defaulting on the debt. What are the tax consequences to Mr Ahmed of this bad debt?
A) $10,000 ordinary loss
B) $10,000 short-term capital loss
C) $10,000 long-term capital loss
D) No loss recognized
Q4) Investment expenses are an itemized deduction.
A)True
B)False
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Chapter 17: Tax Consequences of Personal Activities
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Q1) Jenna Leigh is employed as a receptionist for a CPA firm, but on evenings and weekends, she bakes wedding cakes. In each of the past four years, Jenna's baking activity resulted in a net profit. This year, the activity generated a $720 net loss. Which of the following statements is true?
A) The legal presumption is that Jenna's $720 loss is a business loss.
B) The legal presumption is that Jenna's $720 loss is a nondeductible hobby loss.
C) Jenna must include the revenues from her baking activity in gross income but can't deduct any of her related expenses.
D) Jenna is allowed to report her $720 loss as an itemized deduction.
Q2) A drunk driver seriously injured Leah. The court awarded her $200,000 for her physical injuries and $300,000 as punitive damages. Leah must include $300,000 in gross income.
A)True
B)False
Q3) A nondeductible charitable contribution may be carried forward five years.
A)True
B)False
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Page 19
Chapter 18: The Tax Compliance Process
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Q1) Which of the following statements about the tax litigation process is false?
A) Taxpayers can begin the litigation process in the U.S. Tax Court, a U.S. District Court, or the U.S. Court of Federal Claims.
B) A taxpayer can receive a jury trial only in a U.S. District Court.
C) If the government loses a tax case at the trial level, it can appeal the case to the U.S. Supreme Court.
D) A decision in a tax case by the Supreme Court is final.
Q2) Tony Curtis filed her 2017 income tax return on May 2, 2018. Which of the following statements is false?
A) If Tony's return shows a $719 refund due, she incurs no penalty for filing on May 2.
B) On April 14, Tony requested an automatic extension of time to file her return and paid her estimated tax due with the request. As a result, she incurs no penalty for filing on May 2.
C) If the reason that Tony filed a delinquent return was because of an unexpected death in her family, the IRS may waive any late filing penalty.
D) None of the above is false.
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