Tax Planning and Compliance
Question Bank
Course Introduction
Tax Planning and Compliance focuses on the principles, strategies, and legal frameworks that guide individuals and organizations in managing their tax obligations while maximizing financial efficiency. The course covers key aspects such as tax law fundamentals, methods for reducing tax liability, reporting requirements, and the ethical considerations involved in tax practice. Students will learn to interpret and apply current tax regulations, use planning techniques to benefit both individuals and businesses, and understand compliance processes to avoid legal penalties. The course combines theoretical knowledge with practical skill-building through case studies, real-world examples, and analysis of current tax issues.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 2016 19th Edition by Sally Jones
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1804 Verified Questions
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Chapter 1: Taxes and Taxing Jurisdictions
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Sample Questions
Q1) Ad valorem property taxes are the major source of revenue for local governments.
A)True
B)False
Answer: True
Q2) Mr. Dodd resides in a state with a 6% sales and use tax. He recently traveled to another state to buy a sailboat and paid that state's 4% sales tax. Which of the following statements is true?
A) Mr. Dodd's use tax liability to his home state equals 2% of the purchase price of the furniture.
B) Mr. Dodd does not owe a use tax to his home state.
C) Mr. Dodd's use tax liability to his home state equals 6% of the purchase price of the furniture.
D) None of the above is true.
Answer: A
Q3) Which of the following federal taxes is earmarked for a specific purpose?
A) Corporate income tax
B) Employment taxes
C) Unemployment taxes
D) Both B. and C. are earmarked taxes.
Answer: D
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Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) Which of the following statements about the income effect of an income tax rate increase is true?
A) The income effect is theoretically stronger for low-income taxpayers than for high-income taxpayers.
B) The income effect is theoretically stronger for a family's secondary wage earner than for the family's primary wage earner.
C) The income effect motivates individuals to find ways to increase their before-tax income.
D) Both A. and C. are true.
Answer: D
Q2) If a tax has a proportionate rate structure, a taxpayer's marginal rate and average rate are equal.
A)True
B)False
Answer: True
Q3) The federal government is not required to pay interest on the national debt.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Taxes As Transaction Costs
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Sample Questions
Q1) Mr. Vail made an offer to purchase a business for sale by Mr. Craig. Mr. Vail and Mr. Craig had never met prior to their negotiation of the terms of the sale. The sale is an example of a/an:
A) Arm's length transaction B
B) Private market transaction
C) Public market transaction
D) Both A. and B.
Answer: D
Q2) Every business transaction results in a current tax cost or tax savings.
A)True
B)False
Answer: False
Q3) A taxpayer's marginal tax rate and discount rate are independent variables in the NPV calculation.
A)True
B)False
Answer: True
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Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) Elton Company plans to build a new facility to manufacture backpacks. Elton sells its backpacks across the country for $300 per pack. It could locate the plan in state A, which levies a 5 percent tax on business income. The estimated manufacturing cost per pack in state A would be $120. Alternatively, Elton could locate the plan in state B, which levies a 3 percent tax on business income. The estimated manufacturing cost in state B is $126 per pack. In which state should Elton locate its plant? Provide calculations to support your conclusion.
Q2) JNC Company structured an income-generating transaction so that the income and cash flow shifted to Juno Inc. Presuming that JNC makes rational decisions, which of the following statements is false?
A) JNC and Juno must be related parties that share a mutual economic interest.
B) JNC's marginal tax rate is higher than Juno's marginal tax rate.
C) The income shift should increase the NPV of the transaction.
D) None of the above is false.
Q3) Tax avoidance is the reduction of a person's tax liability through illegal means.
A)True
B)False
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6
Chapter 5: Tax Research
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Sample Questions
Q1) 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.
Q2) If a trial court decision has been appealed and the appellate court reversed the trial court's decision, the trial court decision is considered authoritative.
A)True
B)False
Q3) A citator:
A) Is not an important tax research resource.
B) May be used to determine the status of tax judicial decisions, revenue rulings, and revenue procedures.
C) Is published by the federal government.
D) Provides an editorial explanation of tax judicial decisions.
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Chapter 6: Taxable Income From Business Operations
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Sample Questions
Q1) Murray Inc., a calendar year, accrual basis corporation, accrued $946,000 accrued salary and wage expense at the end of 2015. Murray paid the entire amount of the accrued liability on January 13, 2016. Murray can deduct the entire $946,000 accrued expense in 2015.
A)True
B)False
Q2) A temporary difference between book income and taxable income results when an item of income reflected on the books is never included in taxable income.
A)True
B)False
Q3) Mr. Stern, a cash basis taxpayer, was notified by his bank that he earned $1,193 of interest on his savings account in 2015. Mr. Stern has not withdrawn any funds from this account for eight years and did not receive the notification until January 26, 2016. Mr. Stern does not recognize the interest as income in 2015.
A)True
B)False
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8
Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) The uniform capitalization rules generally allow many indirect costs that were capitalized to inventory for financial statement purposes to be expensed and deducted for tax purposes.
A)True
B)False
Q2) BriarHill Inc. purchased four items of tangible personalty in 2015 at a total cost of $279,000. BriarHill cannot elect to expense any of the cost of the property under Section 179.
A)True
B)False
Q3) Mann Inc. paid $7,250 to a leasing agent to negotiate Mann's 36-month lease for 18,000 square feet of space in a new commercial building. For tax purposes, Mann must:
A) Capitalize the $7,250 cost as a nonamortizable intangible asset.
B) Capitalize the $7,250 cost and amortize it over 36 months.
C) Capitalize the $7,250 cost and depreciate it as 5-year recovery property.
D) Deduct the $7,250 cost in the year of payment.
Q4) Environmental clean-up costs are generally deductible in the year incurred.
A)True
B)False
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Chapter 8: Property Dispositions
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Sample Questions
Q1) Four years ago, Mrs. Beights purchased marketable securities for $75,000 cash. At the end of the current year, the FMV of the securities had plummeted to $4,000. Mrs. Beights may elect to recognize her $71,000 loss this year, even though she still owns the securities.
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) CBM Inc. realized a $429,000 gain on sale of a commercial office building that the corporation placed in service in 1993. Accumulated MACRS depreciation on the complex was $311,800. The entire gain is characterized as Section 1231 gain.
A)True
B)False
Q4) Because land is nondepreciable, it is always a capital asset.
A)True
B)False
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Page 10
Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) LiO Company transferred an old asset with a $13,600 adjusted tax basis in exchange for a new asset worth $11,000 and $1,500 cash. Which of the following statements is false?
A) If the exchange is taxable, LiO recognizes an $1,100 loss.
B) If the exchange is nontaxable, LiO recognizes no loss.
C) If the exchange is nontaxable, LiO's tax basis in the new asset is $12,100.
D) None of these statements is false.
Q2) Grantly Seafood is a calendar year taxpayer. In 2015, a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2015, Grantly received a $1.2 million reimbursement from its insurance company. What is the latest date that Grantly can replace the boats to avoid gain recognition from the involuntary conversion?
A) December 31, 2015
B) December 31, 2016
C) December 31, 2017
D) October 11, 2017
Q3) The wash sale rule can result in the nonrecognition of both gains and losses.
A)True
B)False
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11
Chapter
Corporations
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Sample Questions
Q1) Alan is a general partner in ADK Partnership. His partnership Schedule K-1 reports $50,000 ordinary business income, $22,000 guaranteed payment, $5,000 long-term capital gain, and $400 dividend income. Which of these items are subject to self-employment tax?
A) $50,000 ordinary income
B) $50,000 ordinary business income and $22,000 guaranteed payment
C) $50,000 ordinary business income, $22,000 guaranteed payment, and $5,000 long-term capital gain
D) All income reported on a general partner's Schedule K-1 are subject to self-employment tax
Q2) At the beginning of year 1, Paulina purchased a 25% general partner interest in Gamma Partnership for $25,000. Paulina's partnership Schedule K-1 for year 1 reported that her share of Gamma's debt at year-end was $10,000 and her share of ordinary loss was $5,000. On January 1, year 2, Paulina sold her interest to another partner for $22,000 cash. Compute Paulina's gain or loss on the sale of her partnership interest.
A) $3,000 loss
B) $8,000 loss
C) $2,000 gain
D) $0 gain or loss
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Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) A corporation that owns more than $10 million of total assets uses which schedule to reconcile book income to taxable income?
A) Schedule M-1
B) Schedule M-2
C) Schedule M-3
D) Schedule M-4
Q2) The federal tax law considers the member corporations of an affiliated group to be a single entity for federal tax purposes. An example of this treatment is the requirement to share the 15% tax bracket.
A)True
B)False
Q3) 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
Q4) A corporate taxpayer would prefer a $50,000 deduction to a $50,000 credit.
A)True
B)False
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Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) A business generates profit of $100,000. The owner has a 39.6% marginal tax rate. What amount of corporate and individual income tax will be paid on this profit if the business is a regular corporation and no income is distributed?
A) Corporate tax, $22,250; individual tax, $39,600
B) Corporate tax, $22,250; individual tax, $0
C) Corporate tax, $0; individual tax, $39,600
D) Corporate tax, $22,250; individual tax, $15,550
Q2) Kyrsten Haas expects her S corporation to generate a profit of $200,000. Kyrsten's marginal tax rate on ordinary income is 39.6%. What is Kyrsten's after-tax cash flow from the S corporation if no cash is distributed?
A) $0
B) $(79,200)
C) $120,800
D) $(120,800)
Q3) Partnerships offer more flexibility in allocating income among owners than S corporations.
A)True
B)False
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Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) Which of the following taxes is eligible for the foreign tax credit?
A) Property taxes paid to a foreign country on the value of property owned in that country.
B) Value-added taxes assessed on the value of inventory manufactured in a foreign country.
C) Income tax assessed by a local government within a foreign country.
D) Sales tax assessed on the purchase of consumer goods in a foreign country.
Q2) This year, Sutton Corporation's before-tax income was $2,000,000. It paid $175,000 income tax to Nebraska and $300,000 income tax to Iowa. Compute Sutton's federal income tax.
A) $680,000
B) $518,500
C) $700,000
D) $533,750
Q3) According to Public Law 86-272, the sale of tangible goods to residents of a state is not sufficient to establish nexus in that state.
A)True
B)False
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Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Ms. Kilo is an unmarried individual. She has $219,344 taxable income in 2015. Compute Ms. Kilo's regular tax liability if she files as a single taxpayer and if she files as a surviving spouse.
A) Single $57,500; surviving spouse $61,924
B) Single $55,990; surviving spouse $54,174
C) Single $43,896; surviving spouse $48,468
D) None of the above.
Q2) A husband and wife are allowed only one exemption on a jointly filed return. A)True
B)False
Q3) Melissa, age 16, is claimed as a dependent on her parents' tax return. This year, Melissa earned $510 from babysitting and $220 interest income from a savings account. Compute Melissa's standard deduction.
A) $730
B) $860
C) $510
D) $1,050
Q4) Adjusted gross income equals total income less itemized deductions.
A)True
B)False
Page 16
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Chapter 15: Compensation and Retirement Planning
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Sample
Questions
Q1) An individual who wants to roll over the balance in an employer-sponsored qualified retirement plan to an IRA should always choose a Roth IRA over a traditional IRA.
A)True
B)False
Q2) Traditional IRAs but not Roth IRAs are subject to a minimum distribution requirement when the owner reaches age 70½.
A)True
B)False
Q3) Self-employed individuals have fewer opportunities than employees to underpay income and payroll taxes.
A)True
B)False
Q4) Qualified withdrawals from both traditional and Roth IRAs are tax-exempt. A)True
B)False
Q5) Keogh plans allow self-employed individuals to save for retirement on a tax-deferred basis.
A)True B)False
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Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) A beneficiary's basis of inherited property equals the decedent's adjusted basis immediately prior to death.
A)True
B)False
Q2) Ms. Regga, a physician, earned $375,000 from her medical practice and $20,500 interest and qualified dividends from her investment portfolio. She was allocated a $67,000 loss from a passive activity. Compute Ms. Regga's AGI.
A) $328,500
B) $375,000
C) $395,500
D) None of the above.
Q3) Mr. and Mrs. Golding own 13,850 shares in PTJ mutual fund. This year, they received a $6,390 cash distribution from PTJ. Which of the following statements is false?
A) Some or all of the distribution may be a capital gain distribution.
B) Some or all of the distribution may be a qualifying dividend.
C) Some or all of the distribution may be ordinary income.
D) None of the above is false.
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Chapter 17: Tax Consequences of Personal Activities
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Sample Questions
Q1) Mrs. Kronin received $16,200 child support payments from her former husband. These payments are excluded from Mrs. Kronin's gross income.
A)True
B)False
Q2) Which of the following statements about divorce settlements is false?
A) Alimony is excluded from the recipient's gross income.
B) Child support is excluded from the recipient's gross income.
C) Alimony is an above-the-line deduction for the payer.
D) None of the above is false.
Q3) Which of the following tax payments is allowed as an itemized income tax deduction?
A) Federal gift tax
B) Payroll tax on wages paid to a housekeeper
C) Social Security tax withheld from salary
D) Local property tax on personal automobile
Q4) Gains realized on the sale of personal use assets are taxable.
A)True
B)False
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19
Chapter 18: The Tax Compliance Process
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Sample Questions
Q1) Mr. Hepp, a self-employed consultant, failed to include a $38,200 income item on his 2014 Form 1040, which he filed on March 9, 2015. The gross income reported on the return was $102,380. What is the latest date that the IRS can assess any additional 2014 tax?
A) March 9, 2018
B) April 15, 2018
C) March 9, 2021
D) April 15, 2021
Q2) The IRS assessed Ms. Tinlock a $3,050 income tax deficiency. Which of the following steps can the IRS not take to collect the deficiency?
A) Seize Ms. Tinlock's assets and sell them at auction.
B) Garnish Ms. Tinlock's salary.
C) Assess the deficiency against Ms. Tinlock's children age 21 years or older.
D) The IRS can take all of the above steps to collect the deficiency.
Q3) Employees who deliberately have excess income tax withheld from their salaries in order to receive a tax refund are making an interest-free loan of the excess withholding to the government.
A)True
B)False
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