Tax Accounting Exam Questions
Course Introduction
Tax Accounting is a specialized area of accounting focused on the rules, policies, and laws that govern the taxation process for individuals, businesses, and other entities. This course covers fundamental principles of tax law, the preparation and analysis of tax returns, and the implications of different transactions on tax liability. Students learn about income determination, deductions, credits, and tax planning strategies, as well as compliance with local, state, and federal tax regulations. The course also addresses ethical considerations in tax practice and provides practical experience through case studies and problem-solving exercises relevant to real-world tax scenarios.
Recommended Textbook
South Western Federal Taxation 2013 Comprehensive Edition by William H. Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) A characteristic of FUTA is that:
A)It is imposed on both employer and employee.
B)It is imposed solely on the employee.
C)Compliance requires following guidelines issued by both state and Federal regulatory authorities.
D)It is applicable to spouses of employees but not to any children under age 18.
E)None of the above.
Answer: C
Q2) Julius, a married taxpayer, makes gifts to each of his six children.A maximum of twelve annual exclusions could be allowed as to these gifts.
A)True
B)False
Answer: True
Q3) Upon audit by the IRS, Faith is assessed a deficiency of $40,000 of which $25,000 is attributable to negligence.The 20% negligence penalty will apply to $40,000.
A)True
B)False
Answer: False
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Chapter 2: Working With the Tax Law
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Q1) Which is presently not a major tax service?
A)Standard Federal Tax Reporter.
B)Federal Taxes.
C)United States Tax Reporter.
D)Tax Management Portfolios.
E)All of the above are major tax services.
Answer: B
Q2) The IRS is required to make a letter ruling public.
A)True
B)False
Answer: True
Q3) Tax bills are handled by which committee in the U.S.House of Representatives?
A)Taxation Committee.
B)Ways and Means Committee.
C)Finance Committee.
D)Budget Committee.
E)None of the above.
Answer: B
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Chapter 3: Computing the Tax
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Q1) Emily, whose husband died in December 2011, maintains a household in which her dependent daughter lives.Which (if any) of the following is her filing status for the tax year 2012? (Note: Emily is the executor of her husband's estate.)
A)Single.
B)Married, filing separately.
C)Surviving spouse.
D)Head of household.
E)Married, filing jointly.
Answer: C
Q2) During the year, Kim sold the following assets: business auto for a $1,000 loss, stock investment for a $1,000 loss, and pleasure yacht for a $1,000 loss.Presuming adequate income, how much of these losses may Kim claim?
A)$0.
B)$1,000.
C)$2,000.
D)$3,000.
E)None of the above.
Answer: C
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Rachel owns rental properties.When Rachel rents to a new tenant, she usually requires the tenant to pay an amount in addition to the first month's rent.The additional amount serves as security for damages to the property and the tenant's failure to pay future rents.How should the payments be characterized (e.g., on lease documents) to minimize Rachel's current tax liability?
Q2) Judy is a cash basis attorney.In 2012, she performed services in connection with the formation of a corporation and received stock with a value of $4,000 for her services.By the end of the year, the value of the stock had decreased to $2,000.She continued to hold the stock.Judy must recognize $4,000 of gross income from the stock for 2012.
A)True
B)False
Q3) Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV.If Son's investment income for the year is less than $1,000, Father is not required to impute interest income.
A)True
B)False
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Page 6
Chapter 5: Gross Income: Exclusions
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Q1) Mother participated in a qualified state tuition program for the benefit of her son.She contributed $15,000.When the son entered college, the balance in the fund satisfied the tuition charge of $20,000.When the funds were withdrawn to pay the college tuition for her son, Mother must include $5,000 ($20,000 - $15,000) in her gross income.
A)True
B)False
Q2) Jack received a court award in a civil libel and slander suit against National Gossip.He received $120,000 for damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive damages.Jack must include in his gross income as a damage award: A)$0.
B)$100,000.
C)$120,000.
D)$270,000.
E)None of the above.
Q3) What are the tax problems associated with payments received by a wife from her deceased husband's employer? (Assume the wife renders no services to the employer.)
Q4) What Federal income tax benefits are provided for college students?
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Page 7
Chapter 6: Deductions and Losses: in General
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Q1) For a vacation home to be classified in the primarily rental use category, what attributes must be present?
Q2) Which of the following is correct?
A)A personal casualty loss is classified as a deduction from AGI.
B)Real estate taxes on a taxpayer's personal residence are classified as deductions from AGI.
C)An expense associated with rental property is classified as a deduction from AGI.
D)Only a.and b.are correct.
E)a., b., and c., are correct.
Q3) Landscaping expenditures on new rental property are deductible in the year they are paid or incurred.
A)True
B)False
Q4) Because it has only one owner, any sole proprietorship is permitted to elect the cash method of accounting.
A)True
B)False
Q5) Are all personal expenses disallowed as deductions?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) Taxpayers must sell or exchange their § 1244 stock in order to recognize an ordinary loss (does not apply to stock becoming worthless).
A)True
B)False
Q2) An NOL carryforward is not used in determining the current year's NOL.
A)True
B)False
Q3) Why was the domestic production activities deduction (DPAD) enacted by Congress?
Q4) A farming NOL may be carried back 2 years. A)True
B)False
Q5) Last year, taxpayer had a $10,000 nonbusiness bad debt. Taxpayer also had an $8,000 short-term capital gain and taxable income of $35,000. If taxpayer collects the entire $10,000 during the current year, $8,000 needs to be included in gross income. A)True
B)False
Q6) A father cannot claim a casualty on his daughter's personal use property. A)True B)False Page 9
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Page 10
Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Q1) Which of the following assets would be subject to cost recovery?
A)A painting by Picasso hanging on a doctor's office wall.
B)An antique vase in a doctor's waiting room.
C)Stock in the doctor's LLC.
D)a., b., and c.
E)None of the above.
Q2) Taxable income for purposes of § 179 limited expensing is computed by including the MACRS deduction.
A)True
B)False
Q3) MACRS depreciation is used to compute earnings and profits.
A)True
B)False
Q4) In a farming business, if the uniform capitalization rules are not used, cost is recovered using the ADS straight-line method.
A)True
B)False
Q5) All listed property is subject to the substantiation requirements of § 274. A)True
B)False
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Chapter 9: Deductions: Employee and Self-Employed
Related Expenses
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Q1) Tickets to a theater performance or sporting event can be treated as either business entertainment or a business gift if the taxpayer does not accompany the client to the event.
A)True
B)False
Q2) In terms of meeting the distance test for purposes of deducting moving expenses, which of the following statements is correct?
A)The taxpayer's new job location must be at least 50 miles away from the old job.
B)The taxpayer's new residence must be at least 50 miles away from the new job.
C)The taxpayer's new residence must be at least 50 miles away from the old residence.
D)The taxpayer's new job location must be at least 50 miles farther from the old residence than the old residence was to the old job.
E)None of the above.
Q3) Nicole just retired as a partner in a Philadelphia law firm.She moved to San Francisco where she took a job as an adjunct professor at a local law school.Can Nicole deduct her moving expenses? Explain
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Page 12
Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) Brian, a self-employed individual, pays state income tax payments of:
$900 on January 17, 2012 (4th estimated tax payment for 2011)
$1,000 on April 16, 2012 (1st estimated tax payment in 2012)
$1,000 on June 15, 2012 (2nd estimated tax payment in 2012)
$1,000 on September 17, 2012 (3rd estimated tax payment in 2012)
$800 on January 15, 2013 (4th estimated tax payment of 2012)
Q2) Chad pays the medical expenses of his son, James.James would qualify as Chad's dependent except that he earns $7,500 during the year.Chad may not claim James' medical expenses because he is not a dependent.
A)True
B)False
Q3) In the year of her death, Maria made significant charitable contributions of capital gain property.In fact, the amount of the contributions exceeds 30% of her AGI.Maria's executor can elect to deduct charitable contributions of up to 50% of Maria's AGI on Maria's final income tax return.
A)True
B)False
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Page 13
Chapter 11: Investor Losses
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Q1) David earned investment income of $20,000, incurred investment interest expense of $12,000, and other investment expenses of $9,000 during the current year.David can deduct $12,000 of investment interest for this year.
A)True
B)False
Q2) Nora acquired passive activity A several years ago that until 2011 was profitable.However, the activity produced losses of $100,000 in 2011 and $50,000 in 2012.Nora had passive income from activity B of $40,000 in 2011 and $0 in 2012.How much loss is suspended from activity A in each year?
A)$60,000 in 2011 and $50,000 in 2012.
B)$100,000 in 2011 and $50,000 in 2012.
C)$0 in 2011 and $0 in 2012.
D)None of the above.
Q3) Gail exchanges passive Activity A, which has suspended losses of $15,000, for passive Activity B in a nontaxable exchange.The new owner of passive Activity A can offset the $15,000 suspended losses against passive income in the future.
A)True
B)False
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Page 14
Chapter 12: Tax Credits and Payments
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Q1) 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
Q2) The credit for child and dependent care expenses is an example of a refundable credit.
A)True
B)False
Q3) For purposes of computing the credit for child and dependent care expenses, the qualifying employment-related expenses are limited to an individual's actual or deemed earned income.
A)True
B)False
Q4) An individual generally may claim a credit for adoption expenses in the year in which the expenses are paid.
A)True
B)False
Q5) How does the FICA tax compare to the self-employment tax? How are these two taxes similar and how do they differ?
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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) Mitchell owned an SUV that he had purchased two years ago for $48,000 and which he transfers to his sole proprietorship.How is the sole proprietorship's basis for the SUV calculated? What additional information does Mitchell need?
Q2) Edward, age 52, leased a house for one year in Memphis with an option to buy as his personal residence.At the end of the lease, he purchased the house.He lived there for an additional 26 months before his employer transferred him to Tucson.Expecting to be in Tucson for 18 to 24 months, he rented the Memphis house for 18 months with an option to extend on a month to month basis for an additional 6 months.At the end of the 18-month period, Edward's employer offered him a permanent position in Tucson as branch manager.The tenant who had been occupying Edward's house in Memphis purchased it at the end of the 24-month extended lease period.Is Edward eligible to elect exclusion treatment under § 121?
Q3) Bill is considering two options for selling land for which he has an adjusted basis of $80,000 and on which there is a mortgage of $75,000.Under the first option, Bill will sell the land for $170,000 with a stipulation in the sales contract that he liquidate the mortgage before the sale is complete.Under the second option, Bill will sell the land for $95,000 and the buyer will assume the mortgage.Calculate Bill's recognized gain under both options.
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Chapter 13: A: Property Transactions: Determination
of Gain or Loss, Basis Considerations, and Nontaxable Exchanges-Part 1
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Q1) Steve purchased his home for $500,000.As a sole proprietor, he operates a certified public accounting practice in his home.For this business, he uses one room exclusively and regularly as a home office.In Year 1, $3,042 of depreciation expense on the home office was deducted on his income tax return.In Year 2, Steve sustained losses in his business; therefore, no depreciation was taken on the home office.Had he been allowed to deduct depreciation expense, his depreciation expense would have been $3,175.What is the adjusted basis in the home?
A)$493,783.
B)$496,825.
C)$496,958.
D)$500,000.
E)None of the above.
Q2) A building located in Virginia (used in business) exchanged for a building located in France (used in business) cannot qualify for like-kind exchange treatment.
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 14: Property Transactions: Capital Gains and Losses,
1231, Recapture Provisions
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Q1) Seamus had $16,000 of net short-term capital loss in 2011. In 2012, Seamus has $17,000 of long-term capital loss and $26,000 of long-term capital gain. Which of the following statements is correct?
A)Seamus had a $13,000 short-term capital loss carryover to 2012.
B)Seamus has an $9,000 2012 net long-term capital gain.
C)Seamus has a $4,000 2012 net short-term capital loss.
D)a.and c.
E)None of the above.
Q2) When a patent is transferred, the most common forms of payment received by the transferor are a lump sum and/or periodic payment.
A)True
B)False
Q3) Rental use depreciable machinery held more than 12 months is an example of a § 1231 asset.
A)True
B)False
Q4) A franchisor licenses its mode of business operation to a franchisee.
A)True
B)False
Page 18
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Chapter 15: Alternative Minimum Tax
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Q1) Kerri, who had AGI of $120,000, itemized her deductions in the current year.She incurred unreimbursed employee business expenses of $8,500.Kerri must make a positive AMT adjustment of $2,400 in computing AMT.
A)True
B)False
Q2) The phaseout of the AMT exemption amount for a taxpayer filing as a head of household both begins and ends at a higher income level than it does for a single taxpayer.
A)True
B)False
Q3) In deciding to enact the alternative minimum tax, Congress was concerned about the inequity that resulted when taxpayers with substantial economic incomes could avoid paying regular income tax.
A)True
B)False
Q4) Under what circumstances are corporations exempt from the AMT?
Q5) The sale of business property might result in an AMT adjustment.
A)True
B)False
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Chapter 16: Accounting Periods and Methods
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Q1) Computer Consultants Inc., began business as an adviser to chains of retail stores.The company assisted the stores in the selection of hardware and the development of software used by retail chain stores.Later the company developed software and sold it to its customers.The company also began selling some of the equipment to the customers.That is, the company would bid on a job to purchase and install equipment and the software.The company has consistently reported its income by the cash method.At the end of the year, the company has substantial accounts receivables from clients and a small amount of inventory on hand.What advice can you offer the company regarding its accounting method?
Q2) A cash basis taxpayer sold investment land in 2012 for $200,000.He received $40,000 in the year of sale and $160,000 in 2013.The cost of the land was $80,000.Under the installment method, the taxpayer would report a $24,000 gain in 2012.
A)True
B)False
Q3) What incentives do the tax accounting rules provide for taxpayers to voluntarily change from an incorrect method of accounting that has reduced the company's tax liability in prior years?
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Page 20
Chapter 17: Corporations: Introduction and Operating Rules
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Q1) Almond Corporation, a calendar year C corporation, had taxable income of $900,000, $1.1 million, and $1.2 million for 2009, 2010, and 2011, respectively. Almond's taxable income is $2 million for 2012. Compute the minimum estimated tax payments for 2012 for Almond Corporation.
Q2) The passive loss rules apply to closely held C corporations and to personal service corporations but not to S corporations.
A)True B)False
Q3) An expense that is deducted in computing net income per books but not deductible in computing taxable income is a subtraction item on Schedule M-1.
A)True
B)False
Q4) Albatross, a C corporation, had $140,000 net income from operations and a $25,000 short-term capital loss in the current year.Albatross Corporation's taxable income is $140,000.
A)True B)False
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Chapter 18: Corporations: Organization and Capital Structure
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Q1) When incorporating her sole proprietorship, Samantha transfers all of its assets and liabilities. Included in the $30,000 of liabilities assumed by the corporation is $500 that relates to a personal expenditure. Under these circumstances, the entire $30,000 will be treated as boot.
A)True
B)False
Q2) All accounts payable of a cash basis taxpayer are included as liabilities under § 357(c) in determining whether liabilities exceed basis.
A)True
B)False
Q3) A city contributes $500,000 to a corporation as an inducement to locate in the city. Within the next 12 months, the corporation uses the money to purchase property. The corporation has income of $500,000 and must reduce its tax basis in the property by the same amount.
A)True
B)False
Q4) Issues relating to basis arise when a taxpayer is involved in a § 351 transaction. Describe the underlying rules, and the purpose they serve.
Page 22
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Chapter 19: Corporations: Distributions Not in Complete
Liquidation
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Q1) Keshia owns 200 shares in Parakeet Corporation. Keshia has a 30% beneficiary interest in her deceased grandmother's estate. The estate owns 400 shares in Parakeet Corporation. None of the other beneficiaries of the estate own stock in Parakeet. In applying the § 318 attribution rules:
A)The estate owns 400 shares.
B)Keshia owns 320 shares.
C)Keshia owns 600 shares.
D)The estate owns 460 shares.
E)None of the above.
Q2) Samantha owns stock in Pigeon Corporation (basis of $80,000) as an investment.Pigeon distributes property (fair market value of $300,000; basis of $150,000) to her during the year.Pigeon has current E & P of $20,000 and accumulated E & P of $80,000 and makes no other distributions during the year.What is Samantha's capital gain on the distribution?
A)$0.
B)$80,000.
C)$120,000.
D)$150,000.
E)None of the above.
Q3) How does the payment of a property dividend affect E & P?
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) Mars Corporation merges into Jupiter Corporation by exchanging all of its assets for 300,000 shares of Jupiter stock valued at $2 per share and $100,000 cash.Wanda, the sole shareholder of Mars, surrenders her Mars stock (basis $900,000) and receives all of the Jupiter stock transferred to Mars plus the $100,000. How does Wanda treat this transaction on her tax return?
A)Wanda recognizes a $100,000 gain.Her Jupiter stock basis is $900,000.
B)Wanda recognizes a loss of $100,000.Her Jupiter stock basis is $800,000.
C)Wanda recognizes a $100,000 gain.Her Jupiter stock basis is $700,000.
D)Wanda realizes a $200,000 loss of which $100,000 is recognized.Her Jupiter stock basis is $1 million.
E)None of the above.
Q2) For purposes of the § 338 election, a corporation must acquire, in a taxable transaction, at least 80% of the stock (voting power and value) of another corporation within an 12-month period.
A)True
B)False
Q3) What are the tax consequences of a § 332 liquidation to the parent corporation, subsidiary corporation, and minority shareholder?
Q4) Discuss the role of letter rulings in corporate reorganizations.
Page 24
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Chapter 21: Partnerships
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Q1) Jared owns a 40% interest in the capital and profits of the JAJ Partnership.Immediately before he receives a proportionate nonliquidating distribution from JAJ, the basis of his partnership interest is $60,000.The distribution consists of $40,000 in cash and land with a fair market value of $25,000.JAJ's adjusted basis in the land immediately before the distribution is $30,000.As a result of the distribution, Jared recognizes no gain or loss and his basis in the land is $20,000.
A)True
B)False
Q2) Which of the following is not a specific adjustment to the partners' basis in the partnership interest?
A)Increased by contributions the partner made to the partnership.
B)Decreased by the amount of guaranteed payments the partner received from the partnership.
C)Increased by the partner's share of tax-exempt income.
D)Decreased by any decrease in the partner's share of partnership liabilities.
E)Increased by the partner's share of separately stated income items.
Q3) The "outside basis" is defined as a partner's basis in the partnership interest.
A)True
B)False
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Chapter 22: S: Corporations
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Q1) An S shareholder's stock basis is reduced by flow-through losses before accounting for distributions.
A)True
B)False
Q2) Samantha owned 1,000 shares in Evita, Inc., an S corporation, that uses the calendar year. On October 11, 2012, Samantha sells all of her Evita stock. Her basis at the beginning of 2012 was $60,000. Her share of the corporate income for 2012 was $22,000, and she receives a distribution of $35,000 between January 1 and October 11, 2012. Her stock basis at the time of the sale is:
A)$117,000.
B)$82,000.
C)$60,000.
D)$47,000.
Q3) Identify a disadvantage of being an S corporation.
A)Generally, trusts cannot be shareholders.
B)Losses flow through to the shareholders.
C)The AMT on corporations is avoided.
D)Tax-exempt income flows through to the shareholders.
E)None of the above is a disadvantage of the S election.
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Page 26
Chapter 23: Exempt Entities
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Q1) Which of the following taxes that are imposed on private foundations is, effectively, an audit fee to defray IRS expenses?
A)Tax on self-dealing.
B)Tax on failure to distribute income.
C)Tax on excess business holdings.
D)Only a.and c.
E)None of the above.
Q2) Midge is the chairman of the board for a § 501(c)(3) exempt organization.She would like the exempt organization to be able to avoid private foundation classification status.Describe how this can be achieved.
Q3) All exempt organizations which are subject to the unrelated business income tax must file Form 990-T (Exempt Organization Business Income Tax Return).
A)True
B)False
Q4) Identify the components of the tax model for unrelated business taxable income.
Q5) Which requirements must be satisfied for an exempt organization to be classified as an unrelated trade or business? Is being classified as an unrelated trade or business good or bad?
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Chapter 24: Multistate Corporate Taxation
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Q1) The ____________________ tax usually is applied at the city or county level, as its main source of revenue.
Q2) The sales/use tax that is employed by most U.S.states does not fall on all retail transactions. Identify at least five sales/use tax exemptions that states often allow, eliminating certain transactions from the tax base.
Q3) In conducting multistate tax planning, the taxpayer should:
A)Review tax opportunities in light of their effect on the overall business.
B)Exploit inconsistencies among the taxing statutes and formulas of the states.
C)Consider the tax effects of the plan after accounting for any new compliance and administrative costs that it generates.
D)All of the above are true.
Q4) The starting point in computing state taxable income generally is ____________________.
Q5) Compost Corporation has finished its computation of Federal taxable income. In State Q, the derivation of state corporate taxable income starts with the Federal amount and makes a number of modifications. List at least five such modifications that Compost is likely to encounter.
Q6) 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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Q1) Dark, Inc., a U.S.corporation, operates Dunkel, an unincorporated branch manufacturing operation in Germany.Dark reports $100,000 of taxable income from Dunkel on its U.S.tax return, along with $400,000 of taxable income from its U.S.operations.Dark paid $40,000 in German income taxes related to the $100,000 of Dunkel income. Assuming a U.S.tax rate of 35%, what is Dark's U.S.tax liability after any allowable foreign tax credits?
A)$35,000.
B)$135,000.
C)$140,000.
D)$175,000.
Q2) "Inbound" and "offshore" asset transfers by a U.S.business can be subject to immediate Federal income taxation under § 367.
A)True
B)False
Q3) Freda was born and continues to live in Uruguay. She exports widgets to U.S.customers. The U.S.does not have in force an income tax treaty with Urugauy. Freda's net U.S.income from the widgets is subject to a flat 30% Federal income tax rate.
A)True
B)False
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Chapter 26: Tax Practice and Ethics
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Q1) Which of the following statements does not reflect the rules governing the accuracy-related penalty for negligence?
A)The penalty rate is 20%.
B)The penalty applies whenever the taxpayer takes a return position that is contrary to a court decision.
C)The penalty applies when the taxpayer does not keep records adequate to compute the tax correctly.
D)The penalty is waived if the taxpayer uses Form 8275 to disclose a return position that is reasonable though contrary to the IRS position.
Q2) Circular 230 requires that the tax practitioner use the "best practices" of the tax profession in carrying out a tax engagement. Specify what some of these best practices entail.
Q3) Carole, a CPA, feels that she cannot act as an aggressive advocate for tax clients in today's environment.What aspects of the ethical conduct of a tax practice might have influenced Carole's attitude?
Q4) The IRS can waive the penalty for understating a tax liability if the taxpayer shows ____________________ for the position taken on the tax return.
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Chapter 28: Income Taxation of Trusts and Estates
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Q1) Corpus, principal, and assets of the trust are synonyms.
A)True
B)False
Q2) Generally, capital gains are allocated to fiduciary income, because they arise from current-year transactions as directed by the trustee.
A)True
B)False
Q3) With respect to a trust, the terms creator, donor, and grantor are synonyms.
A)True
B)False
Q4) Your client Ming is a complex trust that operates exclusively in the U.S. Make a list of five or more tax planning opportunities that you might suggest to Ming.
Q5) A trust might be used by one running for a political office.
A)True
B)False
Q6) A complex trust pays tax on the income that it retains and adds to corpus.
A)True
B)False
Q7) Every ____________________ trust is allowed a $300 personal exemption.
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