Tax Planning and Compliance
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Course Introduction
This course provides a comprehensive overview of tax planning concepts and strategies, focusing on individual and corporate tax compliance within the framework of current tax laws and regulations. Students will explore techniques for minimizing tax liabilities through careful financial planning, while ensuring adherence to ethical standards and statutory requirements. Key topics include income recognition, deductions, credits, timing strategies, and the role of tax planning in business decisions. The course also covers compliance procedures, reporting obligations, and recent developments in tax policy, equipping students with practical knowledge to navigate complex tax environments for both personal and professional contexts.
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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Sample Questions
Q1) Under a state inheritance tax,two heirs,a cousin and a son of the deceased,would be taxed at the same rate.
A)True
B)False
Answer: False
Q2) A major disadvantage of a flat tax type of income tax is its complexity.
A)True
B)False
Answer: False
Q3) Which,if any,of the following transactions will decrease a taxing jurisdiction's ad valorem tax revenue imposed on real estate?
A) A tax holiday is granted to an out-of-state business that is searching for a new factory site.
B) An abandoned church is converted to a restaurant.
C) A public school is razed and turned into a city park.
D) A local university sells a dormitory for use as an apartment building.
E) None of the above.
Answer: A
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Chapter 2: Working With the Tax Law
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Sample Questions
Q1) How do treaties fit within tax sources?
Answer: The U.S signs certain tax treaties (sometimes called tax conventions)with foreign countries to render mutual assistance in tax enforcement and to avoid double taxation.Tax legislation enacted in 1988 provided that neither a tax law nor a tax treaty takes general precedence.Thus,when there is a direct conflict with the Code and a treaty,the most recent item will take precedence.A taxpayer must disclose on the tax return any position where a treaty overrides a tax law.There is a $1,000 penalty per failure to disclose for individuals and a $10,000 per failure penalty for corporations.
Q2) Which of the following is not an administrative source of tax law?
A) Reg. § 301.6114-1.
B) Section 2(a)(1)(A).
C) Rev. Rul. 2011-19.
D) Notice 90-20.
E) Ltr. Rul 201008049.
Answer: B
Q3) Temporary Regulations are only published in the Internal Revenue Bulletin.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Tax Formula and Tax Determination: an
Overview of Property Transactions
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Sample Questions
Q1) Katelyn is divorced and maintains a household in which she and her daughter,Crissa,live.Crissa,age 22,earns $11,000 during 2012 as a model.Katelyn does qualify for head of household filing status.
A)True
B)False
Answer: False
Q2) In order to claim a dependency exemption for other than a qualifying child,a taxpayer must meet the support test.Generally,this is done by furnishing more than 50% of a dependent's support.What exceptions exist,if any,where the support furnished need not be more than 50%?
Answer: One exception involves the multiple support agreement.Here,family members collectively furnish more than 50% of the support,but no one person does so.For those qualified individuals who contribute more than 10%,the group can designate which person may claim the dependency exemption.
The second exception involves the divorced parents of children.The custodial parent is entitled to the dependency exemptions for the children.If this parent agrees not to claim the exemption(s),then the noncustodial parent may do so.
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Page 5
Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) With respect to the prepaid income from services,which of the following is true?
A) The treatment of prepaid income is the same for tax and financial accounting.
B) A cash basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the year of receipt.
C) An accrual basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the year of receipt.
D) An accrual basis taxpayer can spread the income over the period services are to be provided on a contract for three years or less.
E) None of the above.
Q2) Under the alimony rules:
A) The income is included in the gross income of the recipient of the payments.
B) A person who receives a property division has experienced an increase in wealth and thus should be subject to tax.
C) State law determine what is alimony for Federal income tax purposes.
D) Payments for child care are included in the child's gross income.
E) None of the above.
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Chapter 5: Gross Income: Exclusions
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Sample Questions
Q1) On January 1,2002,Cardinal Corporation issued 5% 25-year bonds at par and used the $12,000,000 proceeds to finance the construction of a new plant.On January 1,2012,the company acquired the bonds on the open market for $11,500,000.Assuming that Cardinal Corporation is neither bankrupt nor insolvent,the acquisition and retirement of the bonds results in which of the following:
A) The company must recognize a $500,000 gain.
B) The company can make an election to recognize a $500,000 gain or reduce the company's basis in the plant by $500,000.
C) The company must recognize a $500,000 gain and increase the company's basis in the plant by $500,000.
D) The company can amortize the $500,000 gain, recognizing income over the remaining life of the bonds.
E) None of the above.
Q2) Fresh Bakery often has unsold donuts at the end of the day.The bakery allows employees to take the leftovers home.The employees are not required to recognize gross income because the bakery does not incur any additional cost.
A)True B)False
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Page 7
Chapter 6: Deductions and Losses: in General
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Sample Questions
Q1) Salaries are considered an ordinary and necessary expense of a trade or business if they meet what other requirement? What are the tax consequences if this requirement is not met?
Q2) Which of the following are deductions for AGI?
A) Mortgage interest on a personal residence.
B) Property taxes on a personal residence.
C) Mortgage interest on a building used in a business.
D) Fines and penalties incurred in a trade or business.
E) None of the above.
Q3) Under no circumstance can a loss on the sale of a personal use asset be deducted.
A)True
B)False
Q4) Under what circumstance can a bribe be deducted?
Q5) Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business.
A)True
B)False
Q6) What losses are deductible by an individual taxpayer?
Q7) Are all personal expenses disallowed as deductions?
Page 8
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) Red Corporation incurred a $15,000 bad debt last year.Red Corporation also had an $9,000 long-term capital gain last year.Red's taxable income for last year was $100,000.During the current year,Red Corporation,unexpectedly,collected $7,000 on the debt.How should Red Corporation account for the $7,000 collection?
A) $0 income.
B) $3,000 income.
C) $4,000 income.
D) $7,000 income.
E) None of the above.
Q2) Jim had a car accident in 2012 in which his car was completely destroyed.At the time of the accident,the car had a fair market value of $30,000 and an adjusted basis of $40,000.Jim used the car 100% of the time for personal use.Jim received an insurance recovery of 70% of the value of the car at the time of the accident.If Jim's AGI for the year is $60,000,determine his deductible loss on the car.
A) $900.
B) $2,900.
C) $3,000.
D) $9,000.
E) None of the above.
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) Taxpayers may elect to use the straight-line method under MACRS for personalty.
A)True
B)False
Q2) If startup expenses total $53,000 in 2012,$51,000 is amortized over 180 months.
A)True
B)False
Q3) If a new car that is used predominantly in business is placed in service in 2012,the statutory dollar cost recovery limit under § 280F will depend on whether the taxpayer takes MACRS or straight-line depreciation.
A)True
B)False
Q4) 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.
Q5) Discuss the reason for the inclusion amount with respect to leased automobiles.
Page 10
Q6) Discuss the difference between the half-year convention and the mid-quarter convention.
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) Under the right circumstances,a taxpayer's meals and lodging expense can qualify as a deductible education expense.
A)True
B)False
Q2) Under the automatic mileage method,one rate does not cover every type of expense.For 2012,what are the rates for business use,education,moving,charitable,and medical?
Q3) Daniel just graduated from college.The cost of moving his personal belongings from his parents' home to his first job site does qualify for the moving expense deduction.
A)True
B)False
Q4) A statutory employee is not a common law employee but is subject to income tax withholdings.
A)True
B)False
Q5) By itself,credit card receipts will constitute adequate substantiation for travel expenses.
A)True B)False
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) During the year,Eve (a resident of Billings,Montana)spends three consecutive weeks in Louisville,Kentucky.One week is spent representing the Billings First Christian Church at the national convention,and two weeks are spent vacationing with relatives.One third of Eve's travel expenses will qualify as a charitable deduction.
A)True
B)False
Q2) David,a single taxpayer,took out a mortgage on his home for $300,000 nine years ago.In August of this year,when the home had a fair market value of $550,000 and he owed $225,000 on the mortgage,he took out a home equity loan for $350,000.David used the funds to purchase a yacht to be used for recreational purposes.What is the maximum amount of debt on which he can deduct home equity interest?
A) $50,000.
B) $100,000.
C) $325,000.
D) $350,000.
E) None of the above.
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Chapter 11: Investor Losses
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Sample Questions
Q1) In the current year,Rich has a $40,000 loss from a business he owns.His at-risk amount at the end of the year,prior to considering the current year loss,is $24,000.He will be allowed to deduct the $40,000 loss this year if he is a material participant in the business.
A)True
B)False
Q2) Jenny spends 32 hours a week,50 weeks a year,operating a DVD rental store that she owns.She also owns a music store in another city that is operated by a full-time employee.Jenny spends 140 hours per year working at the music store.She elects not to group them together as a single activity under the "appropriate economic unit" standard.
A) Neither store is a passive activity.
B) Both stores are passive activities.
C) Only the DVD rental store is a passive activity.
D) Only the music store is a passive activity.
E) None of the above.
Q3) Describe the types of activities and taxpayers that are subject to the at-risk rules.
Q4) Describe the general rules that limit the deduction of investment interest expense.
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Page 14
Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) The net capital gain included in an individual taxpayer's AMT base is eligible for the alternative tax rate on net capital gain.This favorable alternative rate applies both in calculating the regular income tax and the AMT.
A)True
B)False
Q2) What is the relationship between the regular income tax liability and the tentative AMT?
Q3) Prior to the effect of tax credits,Eunice's regular income tax liability is $325,000 and her tentative AMT is $312,000.Eunice has general business credits available of $20,000.Calculate Eunice's tax liability after tax credits.
A) $0.
B) $305,000.
C) $312,000.
D) $325,000.
E) None of the above.
Q4) Is it possible that no AMT adjustment is necessary for medical expenses in calculating AMTI even though the floor limitation is different (7.5% of AGI for regular income tax compared to 10% for AMT purposes)?
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Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) Which of the following best describes the treatment applicable to unused business credits?
A) Unused amounts are carried forward indefinitely.
B) Unused amounts are first carried back one year and then forward for 20 years.
C) Unused amounts are first carried back one year and then forward for 10 years.
D) Unused amounts are first carried back three years and then carried forward for 15 years.
E) None of the above.
Q2) An employee with outside income may be able to avoid the penalty for underpayment of estimated tax by having his employer increase income tax withholdings.
A)True
B)False
Q3) The tax benefit received from a tax credit is affected by the tax rate of the taxpayer. A)True
B)False
Q4) Describe the withholding requirements applicable to employers.
Q5) Explain the purpose of the tax credit for rehabilitation expenditures and describe the general characteristics of its computation.
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Sample Questions
Q1) Elvis owns all of the stock of Shadow Corporation.The accumulated earnings and profits of Shadow Corporation at the end of the year are a deficit of $12,000.The current earnings and profits are $25,000.Elvis' basis for his stock is $290,000.He receives a distribution of $340,000 on the last day of the tax year.How much dividend income and/or capital gain should Elvis report?
A) $0.
B) Dividend income of $13,000 and capital gain of $37,000.
C) Dividend income of $25,000 and capital gain of $25,000.
D) Dividend income of $0 and capital gain of $50,000.
E) None of the above.
Q2) Monroe's delivery truck is damaged in an accident.Monroe's adjusted basis for the delivery truck prior to the accident is $20,000.If Monroe receives insurance proceeds of $21,000 and recognizes a casualty gain of $1,000,his adjusted basis for the delivery truck after the accident is $21,000.
A)True
B)False
Q3) What effect does a deductible casualty loss have on the adjusted basis of property?
Q4) Define a bargain purchase of property and discuss the related tax consequences.
Page 17
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Sample Questions
Q1) Define qualified small business stock under § 1045.
Q2) Betty owns a horse farm with 500 acres of land (adjusted basis of $600,000).Fifty acres of the land are condemned by the state for $400,000 in order to build a municipal stadium.Since the fair market value of Betty's farm is significantly decreased by the proximity to the future stadium,the state awards Betty $300,000 in severance damages.Betty does not use the $300,000 to restore the usefulness of the farm and all of the $700,000 ($400,000 + $300,000)proceeds are invested in the stock market.What is her recognized gain or loss associated with the receipt of the severance damages?
A) $0.
B) $100,000.
C) $300,000.
D) $340,000.
E) None of the above.
Q3) If a taxpayer reinvests the net proceeds (amount received - related expenses)received in an involuntary conversion in qualifying replacement property within the statutory time period,it is possible to defer the recognition of the realized gain.
A)True
B)False
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) Larry was the holder of a patent on a video game.During 2012,he sold all substantial rights in the patent for $345,000 in cash and a 3% royalty on the purchaser's first $10,200,000 of sales each year related to the product in which the patent is incorporated.Larry had not reduced the patent to practice.He had a $56,000 basis for the patent.During 2012,he received $10,000 in royalties.What is the nature and amount of Larry's gain?
Q2) Short-term capital losses are netted against long-term capital gains and long-term capital losses are netted against short-term capital gains.
A)True
B)False
Q3) Magenta,Inc.,sold a forklift on April 12,2012,for $3,000 (its FMV)to its 100% shareholder,Anna.Magenta's adjusted basis for the forklift was $8,000.Anna's holding period for the forklift:
A) Includes Magenta's holding period for the forklift.
B) Begins on April 12, 2012.
C) Begins on April 13, 2012.
D) Does not begin until Anna sells the forklift.
E) None of the above.
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Chapter 17: Property Transactions: Section 1231 and Recapture Provisions
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Q1) Which of the following would extinguish the § 1245 recapture potential?
A) An exchange of depreciable business equipment for like-kind business equipment with gain realized, but not recognized.
B) A nontaxable incorporation under § 351.
C) A nontaxable contribution to a partnership under § 721.
D) A nontaxable reorganization.
E) None of the above.
Q2) Section 1250 depreciation recapture will apply when accelerated depreciation was used on property used outside the United States and the property is sold at a gain.
A)True
B)False
Q3) Verway,Inc.,has a 2012 net § 1231 gain of $55,000 and had a $62,000 net § 1231 loss in 2011.For 2012,Verway's net § 1231 gain is treated as:
A) $55,000 ordinary loss.
B) $55,000 ordinary gain.
C) $55,000 capital loss.
D) $55,000 capital gain.
E) None of the above.
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Chapter 18: Accounting Periods and Methods
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Q1) The lower of FIFO cost or market inventory method can be used for tax purposes,but the lower of cost or market cannot be used in conjunction with the LIFO method.
A)True
B)False
Q2) The buyer and seller have tentatively agreed that the buyer will pay the seller $100,000 (principal and interest)each year for 5 years.The seller's cost of the asset is $200,000,and he will report the capital gain using the installment method.The buyer and seller are now negotiating the interest rate that will be used to compute the interest included in each $100,000 payment.The relevant Federal rate is 5%,but the market rate on similar contracts in the area is 7%.Why would the seller bargain for a 5% interest rate for the contract rather than a 7% interest rate?
Q3) The installment method can be used for which of the following sales with payments being made in the year following the year of sale?
A) A department store's credit card sales.
B) An individual's sale of common stock in a family owned business.
C) An individual's sale of General Electric common.
D) Depreciable equipment sold for less than its original cost.
E) All of the above.
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Chapter 19: Deferred Compensation
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Q1) Joyce,age 39,and Sam,age 40,who have been married for seven years,are both active participants in qualified retirement plans.Their total AGI for 2012 is $120,000.Each is employed and earns a salary of $65,000.What are their combined deductible contributions to traditional IRAs?
A) $0.
B) $3,000.
C) $4,000.
D) $8,000.
E) None of the above.
Q2) Traditional IRA contributions made after an individual reaches the age of 59 1/2 are treated as excess contributions and are subject to a nondeductible 6% excise penalty tax.
A)True
B)False
Q3) Contributions to a qualified pension plan are immediately deductible by the employer.
A)True
B)False
Q4) A qualified pension and profit sharing plan must satisfy which requirements?
Q5) Compare a § 401(k)plan with an IRA.
Page 22
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Chapter 20: Corporations and Partnerships
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Q1) Under the check-the-box Regulations,a multi-owner entity that defaults (i.e.,makes no election)will be taxed as a partnership.
A)True
B)False
Q2) If the shareholders of a calendar year C corporation elect S status on Thursday,March 15,2012,the election is effective for all of 2012.
A)True
B)False
Q3) Changes in the liabilities (trade accounts payable,bank loans,etc.)of a partnership will affect the basis of a partnership interest.
A)True
B)False
Q4) Four unrelated,calendar year corporations are formed on January 1,2012,and have the following qualified organizational expenditures: $4,000 for Maize Corporation; $15,000 for Orange Corporation; $53,000 for Pearl Corporation; and $56,000 for Chestnut Corporation.What is the maximum deduction each can claim for 2012?
Q5) What causes a partner's basis in a partnership interest to fluctuate?
Q6) Why were the check-the-box Regulations issued?
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