Tax Planning and Compliance
Textbook Exam Questions
Course Introduction
Tax Planning and Compliance focuses on the strategies and regulations that individuals and organizations use to minimize tax liabilities while adhering to legal requirements. The course covers essential topics such as tax law frameworks, tax-efficient investment decisions, deductions and credits, ethical considerations, and the nuances of federal, state, and local tax regulations. Students learn to analyze complex tax scenarios, implement compliance practices, and prepare documentation required by tax authorities. Practical case studies and recent legislative changes are integrated to provide students with a comprehensive understanding of effective tax planning in both personal and corporate contexts.
Recommended Textbook
McGraw Hills Taxation of Individuals and Business Entities 7th Edition by Spilker
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Chapter 1: An Introduction to Tax
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Sample Questions
Q1) How much money would Leonardo and Theresa save if they filed jointly instead of separately for year 2014?
A) Nothing
B) $167.50
C) $309.75
D) $5,907.00
E) None of these
Answer: B
Q2) Taxes influence business decisions such as where a business should locate or how a business should be structured.
A)True
B)False
Answer: True
Q3) The difficulty in calculating a tax is typically in the determination of:
A) The correct tax rate
B) Where to file the tax return
C) The tax base
D) The due date for the return
E) None of these
Answer: C
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Chapter 2: Tax Compliance, the Irs, and Tax Authorities
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Sample Questions
Q1) The "30-day" letter gives the taxpayer the opportunity to request an appeals conference or agree to the proposed IRS adjustment.
A)True
B)False
Answer: True
Q2) Allen filed his 2014 tax return on May 15th, 2015 and underreported his gross income by 30 percent. Assuming Allen's underreporting is not due to fraud, the statute of limitations for IRS assessment on Allen's 2013 tax return should end:
A) May 15th, 2017.
B) April 15th, 2017.
C) May 15th, 2018.
D) April 15th, 2018.
E) None of these.
Answer: E
Q3) Revenue rulings and revenue procedures are examples of primary authorities.
A)True
B)False
Answer: True
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4
Chapter 3: Tax Planning Strategies and Related Limitations
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Sample Questions
Q1) Which of the following is not required to determine the best timing strategy?
A) the taxpayer's after-tax rate of return
B) the taxpayer's tax rate this year
C) the taxpayer's tax rate in future years
D) the taxpayer's tax rate last year
E) None of these
Answer: D
Q2) Nontax factors do not play an important role in tax planning.
A)True
B)False
Answer: False
Q3) When considering cash inflows, higher present values are preferred.
A)True
B)False
Answer: True
Q4) Tax evasion is a legal activity that forms the basis of the basic tax planning strategies discussed in class.
A)True
B)False
Answer: False
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Chapter 4: Individual Income Tax Overview, Exemptions, and Filing Status
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Q1) Taxpayers who file as qualifying widows/widowers are treated exactly the same for tax purposes in all respects as taxpayers who are married filing jointly for tax purposes.
A)True
B)False
Q2) If no one qualifies as the dependent of an unmarried taxpayer, the unmarried taxpayer may still be able to qualify for the head of household filing status.
A)True
B)False
Q3) For purposes of the qualifying child residence test, a child's temporary absence from the taxpayer's home for attending school full-time is counted as though the child lived in the taxpayer's home during the absence.
A)True
B)False
Q4) The test for qualifying children includes an age restriction but the test for qualifying relative does not.
A)True
B)False
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Chapter 5: Gross Income and Exclusions
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Sample Questions
Q1) This year Barney purchased 500 shares of Bell common stock for $20 per share. At year-end the Bell shares were only worth $2 per share. What amount can Barney deduct as a loss this year?
A) $10,000
B) $9,000
C) $1,000
D) Barney can deduct $10,000 only if he includes $1,000 in his taxable income
E) None of these - Barney is not entitled to a loss deduction.
Q2) U.S. citizens generally are subject to tax on all income whether it is generated in the United States or in foreign countries.
A)True
B)False
Q3) The cash method of accounting requires taxpayers to recognize income only when that income is received as cash.
A)True
B)False
Q4) For tax purposes, unearned income means income that has not yet been realized.
A)True
B)False
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Chapter 6: Individual Deductions
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Sample Questions
Q1) Collin and Christine are married and file joint. Their dependent son, Trevor, is a full-time college student at a qualified educational institution. This year Collin and Christine borrowed $30,000 to pay for Trevor's tuition ($22,000) and room and board ($8,000). At year end Collin paid $3,200 in interest on the loan. What amounts can Collin and Christine deduct for interest and education expenses if they estimate that their AGI will be $133,000 absent any deductions for AGI (assume the 2013 rules apply for purposes of the qualified education expense deduction)?
Q2) The definition of qualifying expenses is more restrictive for the qualified educational expense deduction than it is for the education loan interest expense deduction.
A)True
B)False
Q3) Which of the following costs are deductible as an itemized medical expense?
A) The cost of prescription medicine and over-the-counter drugs.
B) Medical expenses incurred to prevent disease.
C) The cost of elective cosmetic surgery.
D) Medical expenses reimbursed by health insurance.
E) None of these costs is deductible.
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Page 8
Chapter 7: Individual Income Tax Computation and Tax Credits
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Sample Questions
Q1) Employees are allowed to deduct a portion of the FICA taxes they pay.
A)True
B)False
Q2) For married couples, the Social Security wage base limitation applies separately to each spouse.
A)True
B)False
Q3) Clarissa's gross tax liability for 2014 is $1,300. She has a $1,500 nonrefundable personal tax credit, a $750 business tax credit, and a $400 refundable personal tax credit. Her employer withheld $1,000 from her pay for taxes. What is her net tax due or refund for this year?
Q4) Rhianna and Jay are married filing jointly in 2014. They have six children for whom they may claim the child tax credit. Their AGI was $123,440. What amount of child tax credit may they claim on their 2014 tax return?
A) $5,300
B) $6,000
C) $12,000
D) $4,000
Page 9
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Chapter 8: Business Income, Deductions, and Accounting Methods
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Sample Questions
Q1) Which of the following is a true statement about the domestic production activities deduction?
A) This deduction is determined by the amount of goods manufactured in the United States for export abroad.
B) The deduction is calculated as a percentage of the cost of goods manufactured in the United States.
C) This deduction represents a subsidy to taxpayers who manufacture or construct goods in the United States.
D) The domestic production activities deduction is not affected by the cost of labor.
E) All of these are true.
Q2) Shadow Services uses the accrual method and reports on a calendar year. This year Shadow agreed to a uniform cleaning contract with Odie Cleaning. Under the contract Odie bills Shadow for cleaning services as the services are provided. At year end Shadow paid Odie $2,350 for the services rendered during the year. In addition, Shadow paid Odie $700 for cleaning services expected in January of next year. What amount, if any, can Shadow deduct for the cleaning services this year?
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Chapter 9: Property Acquisition and Cost Recovery
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Sample Questions
Q1) The §179 immediate expensing election phases out based upon the amount of tangible personal property a taxpayer places in service during the year.
A)True
B)False
Q2) Teddy purchased only one asset during the current year. Teddy placed in service machinery (7-year property) on October 1st with a basis of $76,500. Calculate the maximum depreciation expense, rounded to the nearest whole number (ignoring §179 and bonus depreciation).
Q3) The §179 immediate expensing election phases out based upon a taxpayer's taxable income.
A)True
B)False
Q4) If a machine (seven-year property) being depreciated using the half-year convention is disposed of during the seventh year, a taxpayer must multiply the appropriate depreciation percentage from the MACRS table percentage by 50 percent to calculate the depreciation expense properly.
A)True
B)False
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Chapter 10: Property Dispositions
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Sample Questions
Q1) Which one of the following is not true regarding a like-kind exchange?
A) Loss on like-kind property is not recognized.
B) Gains on boot given are deferred.
C) Losses on boot given are not recognized.
D) Securities can be like-kind with any other securities.
E) All of these.
Q2) Pelosi Corporation sold a parcel of land valued at $300,000. Its basis in the land was $250,000. For the land, Pelosi received $150,000 in cash in the current year and a note providing Pelosi with $150,000 in the subsequent year. What is Pelosi's recognized gain in the current and subsequent year, respectively?
A) $0, $50,000.
B) $10,000, $40,000.
C) $25,000, $25,000.
D) $50,000, $0.
E) None of these.
Q3) Bull Run sold a computer for $1,200 on November 10th of the current year. The computer was purchased for $2,800. Bull Run had taken $1,000 of depreciation deductions. What is Bull Run's gain or loss realized on the computer?
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Chapter 11: Investments
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Sample Questions
Q1) When considering tax-favored investments, taxpayers must not only look at explicit taxes but also implicit taxes to properly compare them with other less favorably taxed investments. Generally speaking, how do explicit and implicit taxes affect the investment decisions of high and low marginal rate taxpayers?
Q2) When 529 plan distributions are not used for qualified higher education expenses, these distributions are subject to an additional penalty of:
A) 5%
B) 10%
C) 15%
D) 25%
E) None of these
Q3) To qualify under the passive activity rental real estate exception, the taxpayer must (1) own at least 15 percent of the property and (2) participate in the process of making management decisions.
A)True
B)False
Q4) Compare and contrast the advantages and disadvantages of Coverdell Educational Savings Plans and 529 Plans.
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Chapter 12: Compensation
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Sample
Questions
Q1) Employees may exclude from income items such as occasional theater tickets, t-shirts, or a Thanksgiving turkey.
A)True
B)False
Q2) Suzanne received 20 ISOs (each option gives her the right to purchase 20 shares of stock for $12 per share) at the time she started working when the stock price was $13 per share. Three years later, when the share price was $23 per share, she exercised all of her options. If Suzanne holds the shares for one additional year and sells them when the market price is $30, how much gain will Suzanne recognize on the sale and how much tax will she pay assuming her marginal tax rate is 35 percent?
Q3) A cafeteria plan provides employees discounted meals at a company sponsored dining room.
A)True
B)False
Q4) Which of the following is false regarding dependent care expenses?
A) Up to $5,000 of reimbursed expenses can qualify.
B) Employers may discriminate among employees.
C) Dependent children under 13 qualify.
D) Spouses who are physically or mentally unable to care for themselves qualify.
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Chapter 13: Retirement Savings and Deferred Compensation
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Sample Questions
Q1) Which of the following is true concerning employer funding of nonqualified deferred compensation plans?
A) Employers are required to invest salary deferred by employees in investments specified by the employees.
B) Employers are required to annually fund their deferred compensation obligations to employees.
C) Employers annually deduct the amount earned by employees under the plan.
D) Employers may discriminate in terms of who they allow to participate in the plan.
Q2) Daniela retired at the age of 65. The current balance in her Roth IRA is $200,000. Daniela established the Roth IRA 10 years ago. Through a rollover and annual contributions Daniela has contributed $80,000 to her account. If Daniela receives a $50,000 distribution from the Roth IRA, what amount of the distribution is taxable?
A) $0
B) $20,000
C) $30,000
D) $50,000
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Chapter 14: Tax Consequences of Home Ownership
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Sample Questions
Q1) Renting a residence may have nontax advantages over owning a home.
A)True
B)False
Q2) Taxpayers who purchased a home in 2008 and received the first-time home buyer tax credit must (with a few limited exceptions) pay the credit back to the government in subsequent years.
A)True
B)False
Q3) Which of the following statements regarding the tax deductibility of points related to a home mortgage is correct?
A) Points paid in the form of a loan origination fee on an original home loan are deductible over the life of the loan.
B) Points paid in the form of prepaid interest on an original home loan are deductible over the life of the loan.
C) Points paid in the form of prepaid interest on a refinance are deductible over the life of the loan.
D) None of these statements is correct.
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Chapter 15: Entities Overview
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Sample Questions
Q1) Which of the following entity characteristics are generally key drivers for small business owners in deciding which entity to choose?
A) Double taxation
B) Required accounting period
C) Liability protection
D) Double taxation and required accounting period
E) Double taxation and liability protection
Q2) Which legal entity is correctly paired with the party that bears the ultimate responsibility for paying the legal entity's liabilities?
A) LLC - LLC members
B) Corporation - Corporation
C) General Partnership - Partnership
D) Limited Partnership - General partner
E) Both Corporation - Corporation and Limited Partnership - General partner.
Q3) Entities taxed as partnerships can use special allocations to reward owners based on their responsibilities, contributions, and individual needs.
A)True
B)False
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Chapter 16: Corporate Operations
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Sample Questions
Q1) Jazz Corporation owns 10% of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable income (loss) before the dividend was ($6,000). What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.?
A) $0
B) $2,800
C) $4,200
D) $7,000
E) None of these.
Q2) NOL and capital loss carryovers are deductible in calculating the charitable contribution limit modified taxable income, while NOL and capital loss carrybacks are not.
A)True
B)False
Q3) A nonqualified stock option will create a permanent book-tax difference in a given year if it vests during the year but is exercised in a later year.
A)True
B)False
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Chapter 17: Accounting for Income Taxes
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Q1) A valuation allowance can reduce both a deferred tax asset and a deferred tax liability.
A)True
B)False
Q2) Heron Corporation reported pretax book income of $4,000,000. Included in the computation were favorable temporary differences of $500,000, unfavorable temporary differences of $700,000, and unfavorable permanent differences of $200,000. Using a tax rate of 34%, compute Heron's current income tax expense or benefit.
Q3) Brown Corporation reports $100,000 of gain from the sale of land on its income statement. For tax purposes, Brown uses the installment method and reports gain of $10,000. The $90,000 difference in the gain reported is a deductible temporary difference.
A)True
B)False
Q4) Sparrow Corporation reported pretax book income of $5,000,000. During the current year, the reserve for warranties increased by $300,000. In addition, tax depreciation exceeded book depreciation by $400,000. Finally, Sparrow received $50,000 of tax-exempt interest from municipal bonds. Using a tax rate of 34%, compute Sparrow's current income tax expense or benefit.
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Page 19
Chapter 18: Corporate Taxation: Nonliquidating
Distributions
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Q1) Comet Company is owned equally by Pat and his sister Pam, each of whom hold 100 shares in the company. Pam wants to reduce her ownership in the company, and it was decided that the company will redeem 50 of her shares for $1,000 per share on December 31, 20X3. Pam's income tax basis in each share is $500. Comet has total E&P of $250,000. What are the tax consequences to Pam because of the stock redemption?
A) $25,000 capital gain and a tax basis in each of her remaining shares of $500.
B) $25,000 capital gain and a tax basis in each of her remaining shares of $100.
C) $50,000 dividend and a tax basis in each of her remaining shares of $100.
D) $50,000 dividend and a tax basis in each of her remaining shares of $50.
Q2) The term "earnings and profits" is well defined in the Internal Revenue Code.
A)True
B)False
Q3) Buckeye Company is owned equally by James and his brother Terrelle, each of whom own 500 shares in the company. Terrelle wants to reduce his ownership in the company, and it was decided that the company will redeem 200 of his shares for $5,000 per share on December 31, 20X3. Terrelle's income tax basis in each share is $1,000. Buckeye has current E&P of $10,000,000 and accumulated E&P of $20,000,000. What is the amount and character (capital gain or dividend) recognized by Terrelle because of the stock redemption?
Page 20
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Chapter 19: Corporate Formation, Reorganization, and Liquidation
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Sample Questions
Q1) Roy transfers property with a tax basis of $800 and a fair market value of $500 to a corporation in exchange for stock with a fair market value of $400 and $50 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $50 on the property transferred. What is Roy's tax basis in the stock received in the exchange?
A) $800
B) $750
C) $700
D) $500
Q2) Tax considerations always are the primary reason for how an acquisition is structured.
A)True
B)False
Q3) M Corporation assumes a $200 liability attached to property transferred to it by Jane in a section 351 transaction. The assumed liability will be treated as boot received by Jane.
A)True
B)False
Q4) What amount of gain or loss does Pennsylvania recognize in the complete liquidation?
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Chapter 20: Forming and Operating Partnerships
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Sample Questions
Q1) What is the difference between a partner's tax basis and at-risk amount?
Q2) Which of the following would not be classified as a material participant in an activity?
A) An individual who participates more than 100 hours a year and the person's participation is not less than any other individual's participation
B) An individual who participated in the activity for at least one of the preceding five taxable years
C) An individual who participates in an activity regularly, continuously, and substantially D) An individual who participates in an activity for more than 500 hours a year
Q3) Fred has a 45% profits interest and 30% capital interest in the SAP Partnership and his tax basis before considering his share of SAP's current year loss is $11,000. Included in his tax basis is a $2,600 share of recourse debt and $5,300 share of nonrecourse debt. Fred is a limited partner in SAP. He is not involved in any other activities. If SAP has a $15,000 ordinary loss for the year, how much of the loss can be deducted currently, and how much of the loss is suspended because of the tax basis, the at-risk, and the passive activity loss limitations?
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Chapter 21: Dispositions of Partnership Interests and Partnership Distributions
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Q1) The SSC Partnership balance sheet includes the following assets on December 31 of the current year: \[\begin{array} { | l | r | r | }
\hline & \text { Basis } & \text { FMV } \\
\hline \text { Cash } & \$ 180,000 & \$ 180,000 \\
\hline \text { Accounts receivable } & - 0 - & 60,000 \\
\hline \text { Equipment } ( \text { cost } = \$ 100,000 ) & 40,000 & 50,000 \\
\hline \text { Land } & 90,000 & 120,000 \\
\hline \text { Total } & \underline { \$ 310,000 } & \$ \$ 410,000 \\
\hline
\end{array}\] Which of SSC's assets are considered hot assets under §751(a)?
A) Cash and accounts receivable.
B) Cash and land.
C) Accounts receivable and land.
D) Accounts receivable and inherent recapture under §1245 in the equipment.
Q2) Tyson, a one-quarter partner in the TF Partnership, receives a proportionate distribution of $70,000 to liquidate his partnership interest on January 1. Tyson's outside basis is $75,000 including his $10,000 share of TF's liabilities. What is the amount and character of Tyson's recognized gain or loss?
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Chapter 22: S Corporations
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Q1) S corporations recognize gains and losses on distributions of property.
A)True
B)False
Q2) Which of the following would not result in an S election termination?
A) Having 120 unrelated shareholders.
B) Having a corporation as a shareholder.
C) Issuing a second class of stock.
D) Having excess passive investment income for two consecutive years.
E) None of these.
Q3) During 2013, MVC operated as a C corporation. However, it made an election to be taxed as an S corporation effective January 1, 2014. MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory. At the end of 2013 its inventory basis under the LIFO method was $63,000. If MVC had used the FIFO method of accounting for its inventory, it would have had a $70,000 basis in its inventory. Finally, MVC's regular taxable income in 2013 was $80,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax?
Q4) S corporations offer the same legal protection to owners as C corporations.
A)True
B)False
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Chapter 23: State and Local Taxes
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Q1) The annual value of rented property is included in the property factor.
A)True
B)False
Q2) Gordon operates the Tennis Pro Shop in Blacksburg, Virginia. The Shop sells, manufacturers, and customizes tennis racquets for serious amateurs. Virginia has a 5 percent sales tax. Assume that a District of Columbia customer picks up a $2,000 racquet order in the Blacksburg store and drives it back to the District of Columbia (where the sales tax rate is 8.5 percent). Determine the sales and use tax liability (assume the Shop has no sales personnel or property in District of Columbia) of the customer?
Q3) Roxy operates a dress shop in Arlington, Virginia. Lisa, a Maryland resident, comes in for a measurement and purchases a $1,500 dress that is shipped to her Maryland residence using a common carrier. Assuming that Virginia's sales tax rate is 5 percent and that Maryland's sales tax rate is 7 percent, what is Roxy's sales and use tax liability?
A) $0.
B) $75 to Virginia.
C) $75 sales tax to Virginia and $15 use tax to Maryland.
D) $90 to Maryland.
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Chapter 24: The Us Taxation of Multinational Transactions
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Q1) Orleans Corporation, a U.S. corporation, manufactures boating equipment. Orleans reported sales from this product group of $200 million, of which $80 million were foreign source sales. The gross profit percentage for domestic sales was 20%, and the gross profit percentage from foreign sales was 10%. Orleans incurred R&E expenses of $15 million, all of which were conducted in the United States. What is the minimum amount of the R&E expense that can be apportioned to foreign source gross income for foreign tax credit purposes, assuming the company can elect either apportionment method?
Q2) To be eligible for the "closer connection" exception to the physical presence test, an individual must be in the United States for less than how many days?
A) 31
B) 61
C) 181
D) 183
Q3) Subpart F income earned by a CFC will always be treated as a deemed dividend to the CFC's U.S. shareholders in the year the subpart F income is earned.
A)True
B)False
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Chapter 25: Transfer Taxes and Wealth Planning of the Cfa Institute
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Q1) The gross estate always includes the value of half of any real property owned by a decedent and another person in joint tenancy with the right of survivorship.
A)True
B)False
Q2) A bypass provision in a will requires a decedent to have a taxable estate in order to use a unified credit to reduce total estate taxes on a married couple.
A)True
B)False
Q3) Adjusted taxable gifts are added to the taxable estate to accomplish which of the following objectives?
A) Prevent double taxation of previously taxed gifts.
B) Increase the marginal tax rate on previously taxed gifts.
C) Increase the marginal tax rate on the taxable estate.
D) Remove inter vivos transfers from cumulative taxable transfers.
E) None of these.
Q4) This year Nicholas earned $500,000 and used it to purchase land in joint tenancy with a right of survivorship with Nevaeh. Has Nicholas made a taxable gift to Nevaeh and, if so, in what amount?
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