Principles of Taxation Question
Bank
Course Introduction
Principles of Taxation introduces students to the fundamental concepts and frameworks that govern tax systems. The course covers the objectives and types of taxation, basic principles such as equity, efficiency, and simplicity, and provides an overview of different tax structures, including income, corporate, and consumption taxes. Students will explore the legal, economic, and administrative aspects of taxation, analyze the impact of tax policies on individuals and businesses, and develop the ability to interpret tax legislation and regulations. By the end of the course, students will have a foundational understanding of how taxes are designed, assessed, and implemented within the broader context of public finance.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 2014 17th Edition by Sally Jones
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Chapter 1: Taxes and Taxing Jurisdictions
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Q1) Company D, which has its home office in Raleigh, North Carolina, conducts business in the United States, Canada, and Mexico. Which of the following statements is true?
A)Because Company D must pay income tax to North Carolina, it is not required to pay tax to any other state.
B)Because Company D must pay income tax to North Carolina, it is not required to pay federal income tax.
C)Because Company D must pay income tax to the United States, it is not required to pay tax to Canada or Mexico.
D)None of the above is true.
Answer: D
Q2) Taxes on personal property are more difficult to administer and enforce than taxes on real property.
A)True
B)False
Answer: True
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Chapter 2: Policy Standards for a Good Tax
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Q1) A progressive rate structure and a proportionate rate structure both result in vertical equity across taxpayers.
A)True
B)False
Answer: True
Q2) Government officials of Country Z estimate that next year's public programs will cost $19 million but that tax revenues will be only $15 million. The officials could avoid a deficit next year by adopting which of the following fiscal strategies?
A)Reduce the cost of public programs by $4 million.
B)Increase taxes by $4 million.
C)Borrow $4 million by issuing new government bonds.
D)All of these strategies will avoid a deficit.
Answer: D
Q3) According to the Keynesian concept of efficiency, an efficient tax should be neutral in its effect on free market allocations of economic resources.
A)True
B)False
Answer: False
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4
Chapter 3: Taxes As Transaction Costs
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Q1) Unlow Inc. must choose between two alternate transactions. Transaction 1 would generate $160,000 cash, all of which would be taxable, while transaction 2 would generate $120,000 cash, none of which would be taxable. Determine the marginal tax rate at which the after-tax cash flows from the two transactions are equal.
A)15%
B)20%
C)25%
D)30%
Answer: C
Q2) Which of the following is not a related party transaction?
A)Acme Corporation leases office space to Norton Company.Mr.and Mrs.Norton own Norton Company and 65% of Acme Corporation's stock.
B)BBD Inc.licenses a patent from Nugo Inc., which owns 82% of BBD's outstanding stock.
C)Beth Teal pays $15,000 a year to her gardener, Ben.Beth is Ben's grandmother.
D)All the transactions are between related parties.
Answer: D
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Chapter 4: Maxims of Income Tax Planning
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Q1) The entity variable is important because the amount of taxable income generated by a business depends on the type of entity conducting the business.
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) The tax character of an item of income can change when Congress amends the tax law.
A)True
B)False
Q4) The time period variable is based on the time value of money.
A)True
B)False
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6
Chapter 5: Tax Research
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Sample Questions
Q1) Locate the revenue procedure that includes the inflation-adjusted individual tax rate schedules for 2013. This revenue procedure usually is released in the fourth quarter of the previous year. Provide a complete citation for your source.
Q2) Novice tax researchers tend to exam less material in the course of a tax research project than experienced tax researchers.
A)True
B)False
Q3) Which of the following is not primary authority on which to base research conclusions?
A)Journal of Taxation article written by a professor.
B)Revenue ruling.
C)U.S.Tax Court decision.
D)U.S.Supreme Court decision.
Q4) Tax research may occur as part of tax compliance or tax planning.
A)True
B)False
Q5) Tax services are typically organized either topically or by Code section.
A)True
B)False
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Chapter 6: Taxable Income From Business Operations
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Sample Questions
Q1) Mr. Stern, a cash basis taxpayer, was notified by his bank that he earned $1,193 of interest on his savings account in 2013. Mr. Stern has not withdrawn any funds from this account for eight years and did not receive the notification until January 26, 2014. Mr. Stern does not recognize the interest as income in 2013.
A)True
B)False
Q2) Which of the following methods of accounting is never permissible for computing taxable income?
A)Cash receipts and disbursements method
B)Accrual method
C)Hybrid method that combines the cash and accrual methods
D)All of the above are permissible methods of accounting.
Q3) Taxpayers may adopt the cash receipts and disbursements method, the accrual method, or a hybrid method of accounting for tax purposes.
A)True
B)False
Q4) Federal and state political lobbying expenses are nondeductible.
A)True
B)False
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Q1) 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
Q2) Kemp Inc., a calendar year taxpayer, generated over $10 million taxable income in 2013. Kemp made one asset purchase: manufacturing equipment costing $543,600. The equipment has a 7-year recovery period and was placed in service on June 14. Assuming that Kemp made the Section 179 election with respect to the equipment, compute Kemp's 2013 cost recovery deduction.
A)$543,600
B)$524,915
C)$506,230
D)None of the above
Q3) 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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Page 9
Chapter 8: Property Dispositions
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Q1) Verno Inc. purchased business equipment in March and sold it in November. Verno's gain or loss recognized on the sale is ordinary.
A)True
B)False
Q2) The sale of business inventory always generates ordinary income or loss.
A)True
B)False
Q3) Hugo Inc., a calendar year taxpayer, sold two operating assets this year. The first sale generated a $38,700 Section 1231 gain, and the second sale generated a $59,400 Section 1231 loss. As a result of these sales, Hugo should recognize:
A)$20,700 ordinary loss
B)$38,700 Section 1231 gain treated as capital gain and $59,400 ordinary loss
C)$20,700 capital loss
D)None of the above
Q4) Mr. and Mrs. Plame sold an investment asset to their grandson Leonard. Because Leonard is a related party, the Plames do not recognize any gain or loss realized on sale.
A)True
B)False
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Chapter 9: Nontaxable Exchanges
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Q1) On July 2, 2012, a tornado destroyed an asset owned by Leigh Inc., a calendar year taxpayer. Leigh's adjusted tax basis in the asset was $22,700, and the reimbursement from its property insurance company was $35,000. If Leigh wants to defer recognizing its $12,300 realized gain, it must replace the asset no later than December 31, 2013.
A)True
B)False
Q2) Eight years ago, Prescott Inc. realized a $16,200 gain on the exchange of old equipment for new equipment. Prescott included the gain in book income, but the exchange was nontaxable. This year, Prescott sold the new equipment for $2,500. At date of sale, the equipment's book basis and tax basis had both been depreciated to zero. Which of the following statements is true?
A)The nontaxable exchange had no effect on Prescott's deferred tax accounts.
B)The nontaxable exchange resulted in a deferred tax asset.
C)The sale of the new equipment had no effect on Prescott's deferred tax accounts.
D)None of the above is true.
Q3) All types of business and investment real properties are like-kind.
A)True
B)False
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11
Chapter 10: Sole Proprietorships, Partnerships, Llcs, and S
Corporations
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Q1) Corporations cannot be shareholders in an S corporation. A)True
B)False
Q2) The allocations made to a partner are reported on Schedule K-1 and are referred to as his or her distributive share of partnership items.
A)True
B)False
Q3) During 2013, Elena generated $24,500 of earnings on ScheduleC. If Elena had no other earned income, how much self-employment tax will she owe on her Schedule C net profit?
A)$3,749
B)$3,259
C)$3,009
D)$3,461
Q4) Haddie's Hats is a regular corporation. The business must file an income tax return each year to report its taxable income or loss and pay any related taxes.
A)True
B)False
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Chapter 11: The Corporate Taxpayer
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Q1) Bisou Inc. made a $48,200 contribution to charity this year. Only $39,000 of the contribution was deductible. Bisou can carry the $9,200 nondeductible contribution back three years and forward five years.
A)True
B)False
Q2) The domestic production activities deduction is a permanent book/tax difference.
A)True B)False
Q3) Corporations are rarely targeted in political debates over taxation.
A)True B)False
Q4) At least three corporations are required to form an affiliated group. A)True B)False
Q5) Corporations with more than $1 million taxable income must pay 100% of their current federal income tax liability in the form of quarterly estimate payments to avoid an underpayment penalty.
A)True B)False
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Chapter 12: The Choice of Business Entity
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Q1) Which of the following statements regarding alternative business forms is true?
A)If an S corporation's election terminates, the corporation is forced to liquidate.
B)Some states treat S corporations as taxable corporations for purposes of corporate franchise taxes.
C)Generally, the transfer of property to a new partnership in exchange for a partnership interest is a taxable event.
D)The owners of a new business should be indifferent between operating as an S corporation and a partnership.
Q2) The use of a corporation as a tax shelter is most effective when the individual tax rate is significantly higher than the corporate tax rate.
A)True
B)False
Q3) If a business is operated as a pass-through entity, the startup losses of the business may be deducted against the current taxable income of the owner.
A)True
B)False
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Chapter 13: Jurisdictional Issues in Business Taxation
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Q1) A foreign source dividend received by a U.S. corporation is eligible for the 70% dividends-received deduction.
A)True B)False
Q2) The sales factor in the UDITPA state income tax apportionment formula equals in-state sales divided by total sales.
A)True B)False
Q3) The foreign tax credit is available for income taxes paid to a foreign country. A)True B)False
Q4) The United States has jurisdiction to tax income earned by any foreign corporation that is a controlled subsidiary of a U.S. parent corporation. A)True B)False
Q5) In the United States, corporations are subject only to taxes imposed by the federal government. A)True B)False
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Chapter 14: The Individual Tax Formula
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Q1) Mr. and Mrs. Lansing, who file a joint tax return, have four dependent children under age 17. Which of the following statements is false?
A)If the Lansings' AGI is $77,900, their child credit is $4,000.
B)If the Lansings' AGI is $127,300, their child credit is $3,100.
C)If the Lansings' AGI is $196,000, their child credit is zero.
D)None of the above is false.
Q2) The standard deduction for single individuals equals one-half of the standard deduction for married individuals filing jointly.
A)True
B)False
Q3) In computing taxable income, an individual is allowed to deduct the lesser of itemized deductions or the standard deduction.
A)True
B)False
Q4) It is impossible for a progressive income tax system to be both marriage neutral and horizontally equitable.
A)True
B)False
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Page 16
Chapter 15: Compensation and Retirement Planning
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Q1) Which of the following statements regarding Keogh plans is false?
A)Keogh plans provide a tax-deferred retirement savings option for self-employed individuals.
B)Keogh plans must be administered by an independent trustee.
C)Keogh plans can be either defined-benefit or defined-contribution plans.
D)A self-employed person with a Keogh plan is not required to provide retirement benefits to his or her employees through the plan.
Q2) Mr. Smith, age 61, withdrew $12,000 from his traditional IRA this year. The balance in the account at year-end was $183,700, which included $40,000 of nondeductible contributions. Compute the taxable portion of the $12,000 withdrawal.
A)$0
B)$2,453
C)$12,000
D)None of the above
Q3) A shareholder-employee of an S corporation prefers to receive a greater salary rather than a greater pro-rata share of corporate taxable income.
A)True
B)False
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Chapter 16: Investment and Personal Financial Planning
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Q1) Up to $100,000 of loss recognized on the sale of Section 1244 stock by a married individual filing a joint return is characterized as ordinary loss.
A)True
B)False
Q2) Qualified dividend income earned by an individual taxpayer is taxed at a maximum income tax rate of 20%.
A)True B)False
Q3) Cash basis individuals must accrue market discount on a bond as annual interest income over the life of the bond.
A)True
B)False
Q4) As a general tax planning rule, an individual should sell assets that have declined in value prior to death and keep appreciated property to transfer to his heirs at his death.
A)True B)False
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Chapter 17: Tax Consequences of Personal Activities
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Q1) Damage to a personal residence by a tornado is an example of a casualty loss.
A)True
B)False
Q2) Mr. and Mrs. Allen made the following interest payments. Determine their deduction for each payment.
a. $28,000 on a $400,000 acquisition mortgage secured by their personal residence
b. $5,000 on a $60,000 second mortgage secured by their personal residence. The Allens used the proceeds to pay off credit card debt and take a second honeymoon.
c. $2,400 on credit card debt
d. $1,500 on a bank loan incurred to purchase a new family car
e. $1,890 on an unsecured bank loan incurred to pay for a new roof on their personal residence
Q3) Which of the following deductions is disallowed in the computation of alternative minimum taxable income (AMTI)?
A)Alimony.
B)Charitable contributions.
C)Interest paid on a home equity debt.
D)None of the above deductions is disallowed.
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Chapter 18: The Tax Compliance Process a Present Value of
$1 B Present Value of Annuity of $1 C 2013 Income Tax Rates
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Q1) Which of the following statements about taxpayer responsibility is false?
A)Taxpayers are responsible for paying the correct amount of federal tax.
B)Taxpayers are responsible for filing the proper federal income tax return.
C)Taxpayers are responsible for maintaining adequate tax records.
D)None of the above is false.
Q2) A person can't be relieved of liability for a tax deficiency under the innocent spouse rule unless that person was forced to sign the tax return under duress.
A)True
B)False
Q3) Which type of audit has the broadest scope and may involve a complete analysis of the taxpayer's accounting records?
A)Correspondence examination
B)Office examination
C)Field examination
D)All of the above
Q4) The harshest administrative penalty that the IRS can impose is the civil fraud penalty.
A)True
B)False
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