Tax Planning and Compliance Exam Practice Tests
Course Introduction
Tax Planning and Compliance is a course designed to equip students with a comprehensive understanding of strategies for effective tax planning and ensuring adherence to tax laws and regulations. The course covers fundamental tax concepts, tax minimization techniques, and the legal and ethical implications of tax decisions for individuals and businesses. Students will explore federal, state, and local tax systems, learn to identify tax-saving opportunities, and understand the critical importance of accurate tax reporting and filing. Practical case studies and current tax issues are integrated to develop skills in interpreting tax legislation, preparing compliance documents, and advising on best practices to optimize tax outcomes legally and responsibly.
Recommended Textbook
South Western Federal Taxation 2013 Individual Income Taxes 36th Edition by William H
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) The FICA tax (Medicare component)on wages is progressive since the tax due increases as wages increase.
A)True
B)False Answer: False
Q2) The IRS agent auditing the return will not issue an RAR if the taxpayer owes no additional taxes.
A)True
B)False Answer: False
Q3) An inheritance tax is a tax on a decedent's right to pass property at death.
A)True
B)False Answer: False
Q4) In preparing a tax return,all questions on the return must be answered.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Working With the Tax Law
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Q1) Texas is in the jurisdiction of the Eighth Circuit Court of Appeals.
A)True
B)False
Answer: False
Q2) Which of the following journals is published by the American Institute of CPAs?
A) Journal of Taxation.
B) Corporate Taxation.
C) Tax Law Review.
D) The Tax Advisor.
E) All of the above.
Answer: D
Q3) Subchapter P refers to the "Partners and Partnerships" section of the Internal Revenue Code.
A)True
B)False
Answer: False
Q4) The Golsen rule has been overturned by the U.S.Supreme Court.
A)True
B)False
Answer: False
Page 4
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Chapter 3: Tax Formula and Tax Determination: an
Overview of Property Transactions
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Q1) For the year a spouse dies,the surviving spouse is considered married for the entire year for income tax purposes.
A)True
B)False
Answer: True
Q2) Benjamin,age 16,is claimed as a dependent by his parents.During 2012,he earned $700 at a car wash.Benjamin's standard deduction is $1,250 ($950 + $300).
A)True
B)False
Answer: False
Q3) In determining the filing requirement based on gross income received,both additional standard deductions (i.e.,age and blindness)are taken into account.
A)True
B)False
Answer: False
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Susan purchased an annuity for $200,000.She is to receive $18,000 each year and her life expectancy is 13 years.If Susan collects under the annuity for 14 years,the entire $18,000 received in the 14th year must be included in her gross income.
A)True
B)False
Q2) Terri purchased an annuity for $100,000.She was to receive $8,000 per year and her life expectancy was 20 years.She died after receiving 15 payments.Terri's final return should reflect a loss of $40,000 (5 payments not made ´ $8,000).
A)True
B)False
Q3) In January 2012,Tammy purchased a bond due in 24 months.The cost of the bond is $857 and its maturity value is $1,000.No interest is paid each year,but the compound interest rate on the bond is 8%.Tammy also purchased a Series EE United States Government bond for $558,with a maturity value in 10 years of $1,000.This is the only Series EE bond she has ever owned.The Series EE bond is sold to yield 6% interest.Tammy is 13 years old and has no other source of income.She is claimed as a dependent by her parents.Compute Tammy's gross income from the bond and Series EE bond for 2012.
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Chapter 5: Gross Income: Exclusions
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Q1) The Royal Motor Company manufactures automobiles.Employees of the company can buy a new automobile for Royal's cost plus 2%.The automobiles are sold to dealers at cost plus 20%.Generally,employees of Local Dealer,Inc.,are allowed to buy a new automobile from the company at the dealer's cost.Officers of Local Dealer are allowed to use a company vehicle (for personal use)at no cost.
A) None of the employees who take advantage of the fringe benefits described above are required to recognize income.
B) Employees of Royal are required to recognize as gross income 18% (20% - 2%) of the cost of the automobile purchased.
C) Employees of Local Dealer are required to recognize as gross income the gross profit Local Dealer loses as a result of the sale to the employees.
D) Local Dealer officers must recognize gross income from the personal use of the company vehicles.
E) None of the above.
Q2) If a tax-exempt bond will yield approximately .65 (1 - .35)times the yield on a taxable bond of equal risk,who benefits from the tax exemption: the Federal government,the state and local governments who issue the bonds,or the investors?
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Chapter 6: Deductions and Losses: in General
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Q1) Mitch is in the 28% tax bracket.He may receive a different tax benefit for a $2,000 expenditure that is classified as a deduction from AGI than he will receive for a $1,000 expenditure that is classified as a deduction for AGI.
A)True
B)False
Q2) Beige,Inc.,an airline manufacturer,is conducting negotiations for the sale of military aircraft.One negotiation is with a U.S.assistant secretary of defense.She can close the deal on the purchase of 50 attack helicopters if she is paid $750,000 under the table.Another negotiation is with the minister of defense of a third world country.To complete the sale of 20 jet fighters to his government,he demands that he be paid a $1 million grease payment.Beige makes the payments and closes the deals.How much of these payments are deductible by Beige,Inc.?
Q3) Emelie and Taylor are employed by the Federal government and own their home in Washington,
Q4) All domestic bribes (i.e.,to a U.S.official)are disallowed as deductions. A)True
B)False
Q5) Briefly discuss the disallowance of deductions for capital expenditures.
Q6) Brenda invested in the following stocks and bonds during 2012.
Page 8
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) If a business debt previously deducted as partially worthless becomes totally worthless this year,only the amount not previously deducted can be deducted this year.
A)True
B)False
Q2) A theft loss of investment property is an itemized deduction not subject to the 2%-of-AGI floor.
A)True
B)False
Q3) The amount of loss for partial destruction of business property is the decline in fair market value of the business property.
A)True
B)False
Q4) Al,who is single,has a gain of $40,000 on the sale of §1244 stock (small business stock)and a loss of $80,000 on the sale of § 1244 stock.As a result,Al has a $40,000 ordinary loss.
A)True
B)False
Q5) How is qualified production activities income (QPAI)calculated?
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Q1) For personal property placed in service in 2012,the § 179 maximum deduction is limited to $139,000.
A)True
B)False
Q2) Nora purchased a new automobile on July 20,2012,for $29,000.The car was used 60% for business and 40% for personal use.In 2013,the car was used 30% for business and 70% for personal use.Nora elects not to take additional first-year depreciation.Determine the cost recovery recapture and the cost recovery deduction for 2013.
Q3) Residential rental real estate includes property where 80% or more of the net rental revenues are from nontransient dwelling units.
A)True
B)False
Q4) The statutory dollar cost recovery limits under § 280F do not apply to all automobiles.
A)True
B)False
Q5) Discuss the tax consequences of listed property being used for the production of income compared to being used in a trade or business.
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) Meg teaches the fifth grade at a local school.During the year,she spends $1,200 for school supplies for use in her classroom.On her income tax return,some of this expense is not reported and the balance is deducted in two different places.Explain what has probably happened.
Q2) In choosing between the actual expense method and the automatic mileage method, a taxpayer should consider the cost of insurance on the automobile.
A)True
B)False
Q3) Frank,a recently retired FBI agent,pays job search expenses to obtain a position with a city police department.Frank's job search expenses do not qualify as deductions. A)True
B)False
Q4) Jacob is a landscape architect who works out of his home.He wonders whether or not he will have nondeductible commuting expenses when he drives to the locations of his clients.Please comment.
Q5) How are combined business/pleasure trips treated for travel within the United States as opposed to foreign travel?
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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) Letha incurred a $1,600 prepayment penalty to a lending institution because she paid off the mortgage on her home early.The $1,600 is deductible as interest expense. A)True
B)False
Q3) Ronaldo contributed stock worth $12,000 to the Children's Protective Agency,a qualified charity.He acquired the stock twenty months ago for $6,000.He may deduct $6,000 as a charitable contribution deduction (subject to percentage limitations).
A)True
B)False
Q4) Linda borrowed $60,000 from her parents for a down payment on a condominium.She paid interest of $5,500 in 2010,$0 in 2011,and $9,000 in 2012.The IRS disallowed the deduction.Can you offer any explanation for the disallowance?
Page 12
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Chapter 11: Investor Losses
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Q1) Describe the general rules that limit the deduction of investment interest expense.
Q2) 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
Q3) Sarah purchased for $100,000 a 10% interest in a business venture that is not subject to the passive activity rules.During the first year,her share of the entity's loss was $120,000.At the beginning of the second year,the entity obtained $800,000 of recourse financing.During the second year,Sarah withdrew cash of $20,000,and her share of the entity's loss was $25,000.Calculate the amount of loss that Sarah may claim in each of the two years and determine her at-risk amount at the end of each year.
Q4) Chris receives a gift of a passive activity from his father whose basis was $60,000.Suspended losses related to the activity are $18,000.Chris will be allowed to offset the $18,000 suspended losses against future passive income.
A)True
B)False
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Chapter 12: Alternative Minimum Tax
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Q1) The AMT exemption for a C corporation is $40,000 reduced by 35% of the amount by which AMTI exceeds $150,000.
A)True
B)False
Q2) The recognized gain for regular income tax purposes and the recognized gain for AMT purposes on the sale of stock acquired under an incentive stock option (ISO)program are always the same because the adjusted basis is the same.
A)True
B)False
Q3) Joel placed real property in service in 2012 that cost $900,000 and used MACRS for regular income tax purposes.He is required to make a positive adjustment for AMT purposes in 2012 for the excess of depreciation calculated for regular income tax purposes over the depreciation calculated for AMT purposes.
A)True
B)False
Q4) The sale of business property might result in an AMT adjustment.
A)True
B)False
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Chapter 13: Tax Credits and Payment Procedures
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Q1) Several years ago,Sarah purchased a structure for $150,000 that was originally placed in service in 1929.In the current year,she incurred qualifying rehabilitation expenditures of $200,000.The amount of the tax credit for rehabilitation expenditures,and the amount by which the building's basis for cost recovery would increase as a result of the rehabilitation expenditures are the following amounts:
A) $20,000 credit, $180,000 basis.
B) $20,000 credit, $200,000 basis.
C) $20,000 credit, $350,000 basis.
D) $40,000 credit, $160,000 basis.
E) None of the above.
Q2) In the event that overwithholding of FICA tax occurs because the taxpayer has more than one employer,the excess amount should be claimed as a credit on the Federal income tax return of the employee.
A)True
B)False
Q3) How does the FICA tax compare to the self-employment tax? How are these two taxes similar and how do they differ?
Q4) Discuss the treatment of unused general business credits.
Q5) Describe the withholding requirements applicable to employers.
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Q1) If a husband inherits his deceased wife's share of jointly owned property in a common law state,both the husband's original share and the share inherited from the deceased wife are stepped-up or down to the fair market value at the date of the wife's death.
A)True
B)False
Q2) Which of the following statements correctly reflects the rules regarding inherited property in 2012?
A) A particular beneficiary's basis can be greater than, equal to, or less than the decedent's basis.
B) A particular beneficiary's holding period includes the donor's holding period.
C) The alternate valuation date election only applies to those assets which have declined in value (i.e., does not cover assets that have increased in value).
D) Only a. and b. are correct.
E) a., b., and c. are correct.
Q3) For a corporate distribution of cash or other property to a shareholder,when does dividend income or a return of capital result?
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) Livestock of different sexes can qualify for like-kind exchange treatment if the livestock has been held for over one year.
A)True
B)False
Q2) Gains and losses on nontaxable exchanges are deferred because the tax law recognizes that nontaxable exchanges result in a change in the substance but not the form of the taxpayer's relative economic position.
A)True
B)False
Q3) To be eligible to elect postponement of gain treatment for an involuntary conversion,what are the three tests for qualifying replacement property?
Q4) The amount realized does not include any amount received by the taxpayer that is designated as severance damages by both the government and the taxpayer.
A)True
B)False
Q5) Libby's principal residence is destroyed by a tornado.She is single and her realized gain is $360,000.Is it possible for Libby's recognized gain to be $0?
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) A lessor is paid $45,000 by its commercial tenant as a lease cancellation fee.The tenant wanted to get out of its lease so it could move to a different building.The lessor had held the lease for three years before it was canceled.The lessor had a zero tax basis for the lease.The lessor has received:
A) Ordinary income of $45,000.
B) Long-term capital gain of $45,000.
C) Short-term capital gain of $45,000.
D) Neither gain nor loss.
E) None of the above.
Q2) Martha is single with one dependent and files as head of household.She had 2012 taxable income of $45,000 which included $16,000 of 0%/15% net long-term capital gain.What is her tax on taxable income using the alternative tax on net long-term capital gain method?
Q3) The tax law requires that capital gains and losses be separated from other types of gains and losses because an alternative tax calculation may be used when taxable income includes net long-term capital gain.
A)True B)False
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Chapter 17: Property Transactions: Section 1231 and Recapture Provisions
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Q1) Which of the following would not be included in the netting of § 1231 gains and losses?
A) Personal use property net casualty gain.
B) Section 1231 loss.
C) Section 1231 gain.
D) All of the above.
E) b. and c.
Q2) Involuntary conversion gains may be deferred if the proceeds of the involuntary conversion are reinvested.
A)True
B)False
Q3) Why is it generally better to have a net § 1231 gain year followed by a net § 1231 loss year rather than a net § 1231 loss year followed by a net § 1231 gain year?
Q4) Personal use property casualty gains and losses are not subject to the § 1231 rules.
A)True
B)False
Q5) Describe the circumstances in which the potential § 1245 depreciation recapture is extinguished.
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Chapter 18: Accounting Periods and Methods
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Q1) Andrew owns 100% of the stock of Crow's Farm Inc.,an S corporation,that raises cattle and corn.The farm's annual gross receipts have never exceeded $3 million and the farm is not considered a tax shelter.
A) The farm must report its sales and cost of goods sold by the accrual method because inventories are material to the business.
B) The income from the farm may be reported by the cash method.
C) The income from the sales of cattle may be reported by the cash method, but the income from the sales of corn must be reported by the accrual method.
D) The income from the sales of corn may be reported by the cash method, but the income from cattle sales must be reported by the accrual method.
E) None of the above.
Q2) A doctor's incorporated medical practice may end the last day of any month of the year.
A)True
B)False
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Chapter 19: Deferred Compensation
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Q1) Which of the following characteristics describes a defined benefit plan?
A) Subject to PBGC plan termination insurance rules.
B) An account for each participant is not established.
C) Defines the amount the employer is required to contribute.
D) Only a. and b.
E) a., b., and c.
Q2) A participant,who is age 38,in a cash or deferred arrangement plan [§ 401(k)] may contribute up to what amount in 2012?
A) $12,000.
B) $16,500.
C) $17,000.
D) $17,500.
E) None of the above.
Q3) Which is not considered to be a type of deferred compensation?
A) SIMPLE IRA.
B) Tax-deferred annuities.
C) Restricted property plan.
D) Cafeteria benefit plan.
E) All of the above are considered types of deferred compensation.
Q4) What is a highly compensated employee?
Page 21
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Chapter 20: Corporations and Partnerships
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Q1) Which,if any,of the following transactions incurred by an S corporation is not a separately stated item?
A) Tax-exempt income.
B) Foreign tax credit.
C) AMT adjustments and tax preference items.
D) Amortization of organizational expenditures.
E) Domestic production activities deduction (DPAD).
Q2) Darlene,a 30% shareholder in a calendar year S corporation,sells her stock on June 8,2012.If the corporation has an operating loss for 2012,none of this loss can be claimed by Darlene because she was not a shareholder as of December 31,2012.
A)True
B)False
Q3) Rust Corporation and Rose Corporation are unrelated C corporations and hold as investments the same number of shares of stock in BP Corporation.As such,they each receive an equal amount of dividends from BP Corporation.If each claims a different dividends received deduction,what could cause the variation?
Q4) Regarding the tax treatment of charitable contributions,corporations enjoy two major advantages over individuals.Elaborate.
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