Tax Law
Final Exam Questions
Course Introduction
Tax Law is an essential course that introduces students to the fundamental principles governing the taxation system, focusing on both theoretical and practical aspects. The course covers key topics including the structure and function of tax authorities, types of taxes (such as income tax, corporate tax, value-added tax, and property tax), tax compliance, and the legal frameworks that regulate tax collection and enforcement. Students will also explore the ethical considerations surrounding taxation, tax avoidance, and evasion, as well as the roles of national and international governing bodies in shaping tax policies. Through case studies, problem-solving exercises, and analysis of contemporary issues, students will develop the analytical skills needed to interpret tax legislation and understand its implications for individuals, businesses, and society at large.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 2013 16th Edition by Sally Jones
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2
Chapter 1: Taxes and Taxing Jurisdictions
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Sample Questions
Q1) A tax with a graduated rate structure must have at least two brackets of tax base.
A)True
B)False
Answer: True
Q2) The city of Mayfield charges individuals convicted of DWI (driving while intoxicated)
$500 for the first conviction and $2,000 for any subsequent conviction. These charges are an example of a(n):
A) User's fee
B) Transaction-based tax
C) Activity-based tax
D) Government penalty
Answer: D
Q3) Which of the following is/are not a primary source of authority for the tax law?
A) A revenue ruling published by the Internal Revenue Service
B) Section 162 of the Internal Revenue Code
C) Treasury Reg. §1.351-2
D) All of the above are primary sources of authority
Answer: D
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3
Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) The statement that "an old tax is a good tax" means that:
A) Changes in the tax law create uncertainty in the business environment.
B) Changes in the tax law disrupt traditional planning strategies.
C) Changes in the tax law increase the compliance burden on businesses.
D) All of the above.
Answer: D
Q2) Congress plans to amend the federal income tax to provide a deduction for the cost of energy-efficient fluorescent light bulbs. Which of the following statements is true?
A) The amendment is intended to improve the efficiency of the tax.
B) The amendment is intended to improve the equity of the tax.
C) The amendment is intended to improve the simplicity of the tax.
D) The amendment is intended to improve the convenience of the tax.
Answer: A
Q3) A tax meets the standard of efficiency if it generates enough revenue to pay for the public goods and services provided by the government.
A)True
B)False
Answer: False
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Chapter 3: Taxes As Transaction Costs
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Sample Questions
Q1) Every business transaction results in a current tax cost or tax savings.
A)True
B)False
Answer: False
Q2) Leto Inc. has $500,000 in an investment paying 8% annual taxable interest. Each year, the corporation incurs a $3,000 nondeductible cash expense relating to the investment. If Leto's marginal tax rate is 35%, compute the annual after-tax cash flow.
A) $23,000
B) $24,050
C) $37,000
D) None of the above.
Answer: A
Q3) Mr. and Mrs. Bing purchased a business from Ms. Clark in an arm's length transaction. This transaction occurred in a private market.
A)True
B)False Answer: True
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Page 5
Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) Mr. Fox has $200,000 to invest. He could buy corporate bonds with a 10% before-tax yield or tax-exempt bonds with an 8% before-tax yield. Which of the following statements is false?
A) If Mr. Fox invests in the tax-exempt bonds, he will pay $4,000 implicit tax every year.
B) If Mr. Fox's marginal tax rate is 15%, he should invest in the corporate bonds.
C) If Mr. Fox's marginal tax rate is 40%, he should invest in the tax-exempt bonds.
D) None of the above is false.
Q2) Which of the following statements about the jurisdiction variable is true?
A) Most businesses are subject to the taxing jurisdiction of more than one government.
B) For federal purposes, state income taxes are deductible in the computation of taxable income.
C) Businesses can often minimize total tax burden by conducting business in jurisdictions with favorable tax climates.
D) All of the above statements are true.
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Chapter 5: Tax Research
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Sample Questions
Q1) Which of the following statements regarding commercial tax services is false?
A) Commercial tax services explain and interpret the tax law.
B) Commercial tax services organize information about primary authorities in a manner that facilitates tax research.
C) Commercial tax services contain both primary authority and secondary authority.
D) Consulting a commercial tax service is typically the final step rather than a preliminary step in the tax research process.
Q2) Editorial explanations provided by electronic tax services are examples of secondary authority.
A)True
B)False
Q3) Step five of the tax research process:
A) Is typically performed only by novice researchers.
B) Is required only if the researcher has made a careless mistake in a previous step.
C) Should only be taken once.
D) Is necessary when the researcher determines that additional facts are needed to complete the analysis of the transaction.
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Chapter 6: Taxable Income From Business Operations
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Sample Questions
Q1) Porter Inc. incurred a $20,000 expense only $13,400 of which was deductible. Which of the following is true?
A) This transaction resulted in a $6,600 unfavorable difference between book income and taxable income.
B) This transaction resulted in a $6,600 favorable difference between book income and taxable income.
C) If this transaction resulted in a temporary book/tax difference, it had no effect on Porter's deferred tax accounts.
D) If this transaction resulted in a permanent book/tax difference, it had no effect on the computation of Porter's tax expense per books.
Q2) Two years ago, Ipenex Inc., an accrual basis taxpayer, wrote off a $17,500 account receivable as uncollectible. This year, Ipenex received an entirely unexpected check for $17,500 from the debtor. Which of the following statements is false?
A) The receipt has no effect on current year book income.
B) The receipt has no effect on current year taxable income.
C) Ipenex must recognize $17,500 taxable income under the tax benefit rule.
D) Ipenex credited the receipt to its allowance for bad debts.
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) Molton Inc. made a $60,000 cash expenditure this year (year 0). Compute the after-tax cost if Molton must capitalize the expenditure and amortize it ratably over three years, beginning in year 0. Molton has a 35% marginal tax rate and uses a 7% discount rate.
A) $41,632
B) $40,344
C) $38,922
D) None of the above
Q2) This year, Zulou Industries capitalized $552,000 indirect costs to inventory for book purposes and $591,600 indirect cost to inventory under unicap. Zulou's cost of goods sold for book purposes was $2,458,000, and its cost of goods sold for tax purposes was $2,707,000. If Zulou has no other book/tax differences, and its book income is $5,000,000, compute Zulou's taxable income.
A) $4,711,400
B) $4,751,000
C) $4,790,600
D) $5,288,600
Q3) The MACRS calculation ignores any salvage or residual value of an asset.
A)True
B)False
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Chapter 8: Property Dispositions
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Sample Questions
Q1) Milton Inc. recognized a $1,300 net Section 1231 loss in 2011. If Milton recognizes a $5,000 net Section 1231 gain in 2012, it must characterize $1,300 as ordinary income.
A)True
B)False
Q2) Gain or loss realized on the disposition of property is recognized unless the tax law provides a nonrecognition exception.
A)True
B)False
Q3) The installment sale method of accounting is not applicable to realized losses.
A)True
B)False
Q4) The same asset may be an ordinary asset in the hands of one taxpayer and a capital asset in the hands of a different taxpayer.
A)True
B)False
Q5) Because land is nondepreciable, it is always a capital asset.
A)True
B)False
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Chapter 9: Nontaxable Exchanges
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Q1) In a like-kind exchange in which both properties are subject to a mortgage, both parties to the exchange are treated as receiving boot equal to the relief of their respective mortgage.
A)True
B)False
Q2) Gain realized on a property exchange that is not recognized is actually deferred rather than nontaxable.
A)True
B)False
Q3) YCM Inc. exchanged business equipment (initial cost $114,800; accumulated depreciation $63,400) for like-kind equipment worth $110,000 and $10,000 cash. As a result, Rydell must recognize:
A) No gain or loss
B) $10,000 Section 1231 gain
C) $10,000 ordinary gain
D) None of the above
Q4) The wash sale rule can result in the nonrecognition of both gains and losses.
A)True
B)False
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Chapter 10: Sole Proprietorships, Partnerships, Llcs, and S
Corporations
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Sample Questions
Q1) Matthew earned $150,000 in wages during 2012. FICA taxes withheld by his employer would have been $11,475.
A)True
B)False
Q2) In 2012, Mike Elfred received a $165,000 salary from his employer and generated $39,000 net earnings from self-employment from his small business. Which of the following statements is true?
A) Mike does not owe any self-employment tax because his salary exceeded the 2012 base amount ($110,100) for federal employment tax.
B) Mike owes both the Medicare and Social Security tax portions of self-employment tax on his $39,000 earnings from his small business.
C) Mike owes Medicare tax but not Social Security tax on his $39,000 earnings from his small business.
D) Mike owes Social Security tax but not Medicare tax on his $39,000 earnings from his small business.
Q3) The earnings of a C corporation are taxed only at the shareholder level.
A)True
B)False
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Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) Harmon, Inc. was incorporated and began business on January 1, 2011. Its tax liability for 2011 was $36,000. Its tax liability for 2012 was $50,000. Which of the following is a correct statement concerning the payment of estimated taxes for 2012?
A) Harmon must pay $12,500 on the15<sup>th</sup> day of April, June, September, and December.
B) Harmon must pay $9,000 on the 15<sup>th</sup> day of April, June, September and December. The $14,000 balance is payable by March 15, 2013.
C) Harmon may pay the $50,000 tax no later than March 15, 2013.
D) None of the above statements is correct.
Q2) A corporate taxpayer would prefer a $50,000 deduction to a $50,000 credit.
A)True
B)False
Q3) The rate schedule for determining the regular tax liability of a corporation includes rates ranging from 15% to 39%.
A)True
B)False
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Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) When a closely held business is formed as a regular corporation, earnings that are distributed to a shareholder-employee as dividends are taxed only once.
A)True
B)False
Q2) A business generates profit of $100,000. The owner has a 35% marginal tax rate. What amount of corporate and individual income tax will be paid on this profit if the business is an S corporation and no income is distributed?
A) Corporate tax, $22,250; individual tax, $35,000
B) Corporate tax, $22,250; individual tax, $0
C) Corporate tax, $0; individual tax, $35,000
D) Corporate tax, $22,250; individual tax, $27,213
Q3) Leo owns 100% of four different corporations. During their tax years ending December 31, each corporation had taxable income of $20,000. What is the regular tax liability of each corporation?
A) $3,000
B) $3,863
C) $5,000
D) $6,800
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Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) A bilateral agreement between the governments of England and France defining and limiting each party's respective tax jurisdiction is an example of a tax treaty.
A)True
B)False
Q2) Columbus Inc. owns 100 percent of the stock of Spania, a foreign corporation. All of Spania's income is foreign source, and its foreign income tax rate is 20 percent. This year, Spania distributed a $100,000 dividend to Columbus.
a. Assuming that Columbus is in the 35 percent tax bracket, compute its U.S. tax on the dividend.
b. How would your computation change if Spania's foreign income tax rate was 45 percent?
Q3) The foreign tax credit can reduce a corporation's alternative minimum tax.
A)True
B)False
Q4) The term "tax haven" refers to a foreign country that imposes an income tax at a rate higher than the U.S. rate.
A)True
B)False
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Page 15
Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) In order to be claimed as a dependent, an individual must be either a qualifying child or a qualifying relative.
A)True
B)False
Q2) A husband and wife are allowed only one exemption on a jointly filed return.
A)True
B)False
Q3) 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 or personal exemption.
A)True
B)False
Q4) The earned income credit is available only to low-income taxpayers with dependent children.
A)True
B)False
Q5) 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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Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) Mr. Hazel, the principal executive officer of a publicly held corporation, received $2.5 million compensation this year. The compensation consisted of an $800,000 salary and a $1.7 million bonus because Mr. Hazel met a performance goal established by outside members of the board of directors. The corporation is allowed to deduct the entire amount of Mr. Hazel's compensation.
A)True
B)False
Q2) Which of the following statements regarding the tax consequences of wages is false?
A) Cash basis employees must report wages in the year payment is actually or constructively received.
B) Employees may elect whether or not their employer withholds income and payroll taxes from their wages.
C) Whether wages are currently deductible by the employer depends on the type of services rendered by the employee.
D) Wages paid to business employees are either deductible by the employer or treated as a capitalized cost.
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Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) Three years ago, Mr. Lewis paid $40,000 for a newly issued corporate bond with a $50,000 stated redemption value. This year, he sold the bond for $43,900. Through date of sale, Mr. Lewis recognized $940 of the original issue discount (OID) as accrued interest income. Compute his gain or loss on sale.
A) $3,900 long-term capital gain
B) $3,900 ordinary income
C) $2,960 ordinary income
D) $2,960 long-term capital gain
Q2) Electing to reinvest dividends in additional shares of stock does not defer income recognition.
A)True
B)False
Q3) Individual taxpayers may carry nondeductible capital losses forward indefinitely. A)True B)False
Q4) Brokerage fees paid when stock is purchased are added to the basis of the stock. A)True
B)False
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Chapter 17: Tax Consequences of Personal Activities
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Sample Questions
Q1) Mr. and Mrs. Alvarez paid $130,000 for their home 30 years ago. They recently sold this home and moved into a retirement apartment. Describe the tax consequences of the sale assuming that the amount realized was:
a. $125,000
b. $450,000
c. $850,000
Q2) 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.
Q3) Ben received a $5,000 tuition scholarship from his local community college. He can exclude the $5,000 from gross income.
A)True
B)False
Q4) Alimony payments are included in the recipient's gross income.
A)True
B)False
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Chapter 18: The Tax Compliance Process
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Q1) Tony Curtis filed her 2011 income tax return on May 2, 2012. 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.
Q2) 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.
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