Principles of Taxation
Midterm Exam
Course Introduction
Principles of Taxation introduces students to the fundamental concepts, objectives, and structures of taxation systems, with a focus on both direct and indirect taxes. The course covers the rationale for taxation, types of taxes, tax incidence, tax policy objectives, and the administrative aspects that ensure the effective collection and enforcement of taxes. Students explore the legal framework, principles of equity and fairness in taxation, and the economic impact of different tax regimes on individuals, businesses, and society as a whole. Through real-world examples and case studies, the course develops practical skills in tax calculation and compliance, building a solid foundation for further study or careers in accounting, finance, law, or public administration.
Recommended Textbook
McGraw Hills Taxation of Business Entities 2019 Edition 10th Edition by Brian C. Spilker
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14 Chapters
1476 Verified Questions
1476 Flashcards
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Chapter 1: Business Income, Deductions, and Accounting Methods
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99 Verified Questions
99 Flashcards
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Sample Questions
Q1) John is a self-employed computer consultant who lives and works in Dallas. John paid for the following activities in conjunction with his business. Which is not deductible in any amount?
1) Dinner with a potential client where the client's business was discussed.
2) A trip to Houston to negotiate a contract.
3) A seminar in Houston on new developments in the software industry.
4) A trip to New York to visit a school chum who is also interested in computers.
A) 1 only.
B) 2 only.
C) 3 only.
D) 4 only.
E) None of the choices are correct.
Answer: D
Q2) The test for whether an expenditure is reasonable in amount is whether the expenditure was for an "arm's length" amount.
A)True
B)False
Answer: True
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Chapter 2: Property Acquisition and Cost Recovery
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109 Verified Questions
109 Flashcards
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Sample Questions
Q1) Timothy purchased a new computer for his consulting practice on October 15 of the current year. The basis of the computer was $4,000. During the Thanksgiving holiday, he decided the computer didn't meet his business needs and gave it to his college-aged son in another state. The computer was never used for business purposes again. Timothy had $50,000 of taxable income before depreciation. What is Timothy's total cost recovery expense with respect to the computer during the current year?
Answer: $0.
No depreciation expense or §179 expense may be taken on an asset which is acquired by and disposed of during the same taxable year.
Q2) How is the recovery period of an asset determined?
A) Estimated useful life.
B) Treasury regulation.
C) Revenue Procedure 87-56.
D) Revenue Ruling 97-56.
E) None of the choices are correct.
Answer: C
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4
Chapter 3: Property Dispositions
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110 Verified Questions
110 Flashcards
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Sample Questions
Q1) Jessie sold a piece of land held for investment for $250,000. Jessie bought the land two years ago for $195,000. What is the amount and character of Jessie's gain?
Answer: Capital gain of $55,000.
The $55,000 ($250,000 $195,000) gain is capital because the land was held for investment.
Q2) Reid had a business building destroyed in a fire. The old building was purchased for $375,000 and $60,000 of depreciation deductions had been taken. Although the old building had a fair market value of $425,000 at the time of the fire, his insurance proceeds were limited to $400,000. Reid found qualified replacement property which he acquired six months later for $390,000. What is the amount of Reid's realized gain and recognized gain?
Answer: $85,000 realized gain and $10,000 recognized gain. The realized gain is the amount realized ($400,000 insurance proceeds) less the $315,000 adjusted basis ($375,000 cost basis less $60,000 of depreciation). The recognized gain is the lesser of $85,000 realized gain or the amount not reinvested in qualified replacement property ($10,000 = $400,000 of insurance proceeds less $390,000 cost of new property).
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Chapter 4: Entities Overview
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80 Verified Questions
80 Flashcards
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Sample Questions
Q1) Logan, a 50 percent shareholder in Military Gear Inc. (MG), is comparing the tax consequences of losses from C corporations with losses from S corporations. Assume MG has a $100,000 tax loss for the year, Logan's tax basis in his MG stock was $150,000 at the beginning of the year, and he received $75,000 ordinary income from other sources during the year. Assuming Logan's marginal tax rate is 24%, how much more tax will Logan pay currently if MG is a C corporation compared to the tax he would pay if it were an S corporation?
A) $0
B) $6,000
C) $12,000
D) $18,000
Q2) Which legal entity is generally best suited for going public?
A) Corporation.
B) LLC.
C) Limited Liability Partnership.
D) General Partnership.
E) All of these entities are equally suited for going public.
Q3) S corporations have more restrictive ownership requirements than other entities.
A)True
B)False
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Chapter 5: Corporate Operations
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109 Verified Questions
109 Flashcards
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Sample Questions
Q1) What is the unextended due date of the tax return of a calendar-year C corporation for 2018?
A) February 15.
B) March 15.
C) April 15.
D) October 15.
Q2) Which of the following is not an acceptable method of determining the required annual payment of federal income tax for corporations?
A) 100 percent of the prior year's tax liability (with a few exceptions).
B) 100 percent of the current year's tax liability.
C) 100 percent of the estimated current year tax liability using the annualized income method.
D) All of the choices are acceptable methods of determining the required annual payment of federal income tax for corporations.
Q3) The dividends received deduction is subject to a limitation based on modified taxable income.
A)True
B)False
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Chapter 6: Accounting for Income Taxes
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100 Verified Questions
100 Flashcards
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Sample Questions
Q1) Frost Corporation reported pretax book income of $3,000,000. Included in the computation were favorable temporary differences of $200,000, unfavorable temporary differences of $350,000, and unfavorable permanent differences of $50,000. Compute Frost's deferred income tax expense or benefit.
Q2) Which of the following items does not result in a permanent difference?
A) Accelerated tax depreciation in excess of straight-line book depreciation.
B) Interest income from a tax-exempt municipal bond.
C) Dividend received deduction on the income tax return.
D) Excess tax benefits from the exercise of an NQO.
Q3) A cumulative financial accounting (book) loss over three years likely would be considered significant negative evidence in a valuation allowance analysis.
A)True
B)False
Q4) Yellow Rose Corporation reported pretax book income of $100,000,000. Tax depreciation exceeded book depreciation by $100,000. During the year Yellow Rose capitalized $50,000 into ending inventory under §263A. Capitalized inventory costs of $75,000 in beginning inventory were deducted as part of cost of goods sold on the tax return. Compute Yellow Rose's taxes payable or refundable.
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Page 8
Chapter 7: Corporate Taxation: Nonliquidating Distributions
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100 Verified Questions
100 Flashcards
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Sample Questions
Q1) Austin Company reports positive current E&P of $200,000 and negative accumulated E&P of $300,000. Austin distributed $250,000 to its sole shareholder, Betsy Bevo, on December 31, 20X3. Betsy' tax basis in her stock is $125,000. How much of the $250,000 distribution is treated as a dividend to Betsy and what is her tax basis in Austin stock after the distribution?
Q2) Wonder Corporation declared a common stock distribution to all shareholders of record on September 30, 20X3. Shareholders will receive three shares of Wonder stock for each five shares of stock they already own. Diana owns 300 shares of Wonder stock with a tax basis of $90 per share (a total basis of $27,000). The fair market value of the Wonder stock was $180 per share on September 30, 20X3. What are the tax consequences of the stock distribution to Diana?
A) $0 dividend income and a tax basis in the new stock of $180 per share.
B) $0 dividend income and a tax basis in the new stock of $67.50 per share.
C) $0 dividend income and a tax basis in the new stock of $56.25 per share.
D) $10,800 dividend and a tax basis in the new stock of $180 per share.
Q3) A corporation's "earnings and profits" account is equal to the company's "retained earnings" account on its balance sheet.
A)True
B)False
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Page 9
Chapter 8: Corporate Formation, Reorganization, and Liquidation
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Sample Questions
Q1) A liquidation of a corporation always is a taxable event for the shareholder(s) of the liquidated corporation.
A)True
B)False
Q2) Jamie transferred 100 percent of her stock in Fox Company to Otter Corporation in a Type A merger. In exchange, she received stock in Otter with a fair market value of $400,000 plus $600,000 in cash. Jamie's tax basis in the Fox stock was $600,000. What amount of gain does Jamie recognize in the exchange and what is her basis in the Otter stock she receives?
A) $400,000 gain recognized and a basis in Otter stock of $400,000.
B) $600,000 gain recognized and a basis in Otter stock of $400,000.
C) $400,000 gain recognized and a basis in Otter stock of $600,000.
D) $600,000 gain recognized and a basis in Otter stock of $600,000.
Q3) Control as it relates to a section 351 transaction is strictly defined to be 80 percent or more of the voting power of the stock of the corporation to which property is transferred.
A)True
B)False
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Page 10
Chapter 9: Forming and Operating Partnerships
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106 Verified Questions
106 Flashcards
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Sample Questions
Q1) Hilary had an outside basis in LTL, General Partnership of $10,000 at the beginning of the year. LTL reported the following items on Hilary's K-1 for the year: ordinary business income of $5,000, a $10,000 reduction in Hilary's share of partnership debt, a cash distribution of $20,000, and tax-exempt income of $3,000. What is Hilary's adjusted basis at the end of the year?
A) ($12,000).
B) ($9,000).
C) $0.
D) $15,000.
E) $18,000.
Q2) This year, Reggie's distributive share from Almonte Partnership includes $8,000 of interest income, $4,000 of dividend income, and $60,000 ordinary business income.
A. Assume that Reggie materially participates in the partnership. How much of his distributive share from Almonte Partnership is potentially subject to the Medicare contribution tax?
B. Assume that Reggie does not materially participate in the partnership. How much of his distributive share from Almonte Partnership is potentially subject to the Medicare contribution tax?
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11
Chapter 10: Dispositions of Partnership Interests and Partnership Distributions
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100 Flashcards
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Sample Questions
Q1) Which of the following statements regarding the sale of a partnership interest is False?
A) The seller's primary tax concern in a partnership interest sale is calculating the amount and character of gain or loss on the sale.
B) The selling partner determines the gain or loss as the difference between the amount realized and her outside basis in the partnership.
C) Hot assets change the character of a gain on the sale from ordinary income to capital gain.
D) Any debt relief increases the amount the partner realizes from the sale.
Q2) Tyson, a one-quarter partner in the TF Partnership, receives a proportionate distribution of $70,000 to liquidate his partnership interest on January 1. Tyson's outside basis is $75,000 including his $10,000 share of TF's liabilities. TF does not hold any hot assets. What is the amount and character of Tyson's recognized gain or loss?
Q3) The purpose of hot asset rules is to ensure that selling partners recognize all gain or loss on the sale of their partnership interests as capital.
A)True
B)False
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Page 12
Chapter 11: S Corporations
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134 Flashcards
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Sample Questions
Q1) An S corporation election may be voluntarily or involuntarily terminated.
A)True
B)False
Q2) At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc. Earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J. D. owns 25% of Clampett, Inc., his basis in Clampett, Inc. at the beginning of the year is $30,000, and his share of the distribution was $50,000. What is J. D.'s basis in the Clampett, Inc. stock after these transactions?
A) $0.
B) $5,000.
C) $12,500.
D) $15,000.
E) None of the choices are correct.
Q3) The same exact requirements for forming and contributing property govern S corporations and partnerships.
A)True
B)False
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Chapter 12: State and Local Taxes
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117 Flashcards
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Sample Questions
Q1) State tax law is comprised solely of legislative authority.
A)True
B)False
Q2) Which of the following statements regarding income tax commercial domicile is incorrect?
A) The location where a business is headquartered.
B) The location where a business is incorporated.
C) The location from which a business directs its operations.
D) None of the choices are correct.
Q3) Businesses must collect sales tax only in states where it has sales tax nexus.
A)True
B)False
Q4) Which of the following is incorrect regarding nondomiciliary businesses?
A) Subject to tax only where income tax nexus exists.
B) A business cannot be nondomiciliary where headquartered.
C) A business can be nondomiciliary in only one jurisdiction.
D) Subject to tax only where a sufficient connection exists.
Q5) List the steps necessary to determine an interstate businesses' state income tax liability.
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Chapter 13: The US Taxation of Multinational Transactions
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Sample Questions
Q1) Guido was physically present in the United States for 150 days in 2018, 120 days in 2017, and 90 days in 2016. Under the substantial presence test formula, how many days is Guido deemed physically present in the United States in 2018?
A) 360
B) 205
C) 190
D) 150
Q2) All taxes paid to a foreign government by a U.S. individual are creditable on the individual's U.S. tax return.
A)True
B)False
Q3) Which of the following persons should not be treated as a "U.S. shareholder" of a controlled foreign corporation (CFC) for subpart F purposes?
A) A U.S. citizen owning 5 percent of the CFC.
B) A U.S. citizen owning 15 percent of the CFC.
C) A U.S. corporation owning 15 percent of the CFC.
D) All of the above named persons are U.S. shareholders for subpart F purposes.
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Page 15
Chapter 14: Transfer Taxes and Wealth Planning
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Sample Questions
Q1) Andrea transferred $500,000 of stock to a trust, with income to be paid to her niece for 20 years (value $125,000) and the remainder to her nephew (value $375,000). Andrea named a bank as independent trustee but retained the power to determine how much income, if any, will be paid in any particular year. What is the amount of the taxable gift, if any? Explain your answer.
Q2) Adjusted taxable gifts are included when calculating the taxable estate but are not subject to double taxation because a tax credit is provided for taxes payable on adjusted taxable gifts.
A)True
B)False
Q3) A transfer of a terminable interest will not generally qualify for a marital deduction. A)True
B)False
Q4) The gross estate may contain property transfers that are not included in the probate estate.
A)True
B)False
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