Tax Planning for Business and Investment Exam Bank
Course Introduction
This course provides a comprehensive overview of tax planning strategies for businesses and individual investments. Students will examine the principles of income, corporate, and capital gains taxation, and learn how to structure transactions to minimize tax liability while remaining compliant with relevant laws and regulations. Case studies and real-world examples will highlight approaches to tax-efficient business structuring, investment portfolio management, and succession planning. The course also covers the implications of recent tax reforms, international tax considerations, and the ethical dimensions of tax planning. By the end of the course, students will have practical knowledge and analytical skills to identify tax-saving opportunities and develop effective tax strategies for both business operations and personal investment portfolios.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 2018 21st Edition by Sally Jones
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Chapter 1: Taxes and Taxing Jurisdictions
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Q1) Which of the following is not an advantage of state conformity to federal corporate income tax laws?
A)States have complete control over their corporate income tax revenues.
B)States do not have to enact comprehensive corporate income tax statutes.
C)Conformity eases the compliance burden of corporate taxpayers.
D)All of the above are advantages of state conformity.
Answer: A
Q2) Mrs.King is a U.S.citizen who permanently resides in South Africa.Which of the following statements is true?
A)The U.S.government has jurisdiction to tax Mrs.King.
B)The U.S.government has no jurisdiction to tax Mrs.King because she does not live in the United States.
C)The U.S.government has no jurisdiction to tax Mrs.King because she does not earn any income from a source within the United States.
D)Mrs.King can elect whether to pay tax to the United States or to South Africa.
Answer: A
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Chapter 2: Policy Standards for a Good Tax
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Q1) Which of the following statements does not describe the Keynesian standard of tax efficiency?
A)An efficient tax encourages economic growth.
B)An efficient tax encourages full employment.
C)An efficient tax encourages price-level stability.
D)All of the above describe the Keynesian standard of tax efficiency.
Answer: D
Q2) The federal government is not required to pay interest on the national debt.
A)True
B)False
Answer: False
Q3) Which of the following statements about vertical equity is false?
A)Vertical equity focuses on a fair rate structure instead of a fair measurement of the tax base.
B)If persons with greater ability to pay owe more tax than persons with lesser ability to pay,the tax is vertically equitable.
C)A tax with a single percentage rate is not vertically equitable.
D)None of the above is false.
Answer: C
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Page 4
Chapter 3: Taxes As Transaction Costs
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Q1) Tax law uncertainty is the risk that the Internal Revenue Service will challenge a taxpayer's tax treatment on audit.
A)True
B)False
Answer: False
Q2) An increase in the risk associated with a future stream of cash should result in an increase in the discount rate used in the present value calculation.
A)True
B)False
Answer: True
Q3) Ms.Lenz has $100,000 in an investment paying 9% annual interest.Her marginal tax rate is 25%.Which of the following statements is false?
A)Ms.Lenz's annual before-tax cash flow from this investment is $9,000.
B)If the interest is tax-exempt,Ms.Lenz's annual after-tax cash flow is $9,000.
C)If the interest is taxable,Ms.Lenz's annual after-tax cash flow is $6,750.
D)None of the above is false.
Answer: D
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Page 5
Chapter 4: Maxims of Income Tax Planning
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Q1) Tatun Inc.pays state income tax at a 5% rate and federal income tax at a 34% rate.Tatun recently engaged in a transaction in Mexico,which levied a $25,200 income tax on the transaction.Tatun's pretax net income for the current year is $1,913,900.Compute Tatun's total income tax burden assuming that:
A.The Mexican tax is nondeductible for state and federal tax purposes.
B.The Mexican tax is deductible for state and federal tax purposes.
Q2) Assume that Congress recently amended the tax law to provide for a maximum 12% rate on interest income from U.S.savings bonds.Compute the tax savings from this preferential rate for:
A.Mrs.Edwin,who has a 15% marginal rate on ordinary income and earned $290 interest on her investment in U.S.savings bonds.
B.Mr.Kalter,who has a 35% marginal rate on ordinary income and earned $290 interest on his investment in U.S.savings bonds.
Q3) Income-shifting transactions occur more frequently between related parties than between unrelated parties.
A)True B)False
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Chapter 5: Tax Research
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Sample Questions
Q1) Which of the following is not a typical strategy for using a commercial tax service?
A)Using the topical index
B)Using the table of contents
C)In an electronic service,using a keyword search
D)All of the above are typical strategies for using a commercial tax service.
Q2) Editorial explanations found within a tax service are a type of primary authority.
A)True
B)False
Q3) Treasury regulations are considered statutory authority.
A)True
B)False
Q4) Which of the following is not a primary authority?
A)Section 465 of the Internal Revenue Code
B)Munro v.Comm.,267 F.3d 1918 (CA-8,2004)
C)CCH Master Tax Guide
D)All of the above are primary authorities.
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Page 7
Chapter 6: Taxable Income From Business Operations
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Sample Questions
Q1) RRK,a calendar year,accrual basis taxpayer,is involved in a legal dispute over an alleged trademark violation.At the end of the year,RRK's accountant recorded a $750,000 accrued expense for the estimated settlement cost of the dispute.Which of the following statements is true?
A)RRK can deduct the $750,000 accrued expense.
B)RRK can't deduct the $750,000 accrued expense because the liability fails the all-events test.
C)RRK can never deduct the $750,000 expense.
D)RRK can deduct the accrued expense only if the dispute is settled within eight and one-half months after the close of the taxable year.
Q2) Jackey Company,a calendar year,accrual basis taxpayer,did not pay the $44,200 December rent on its commercial office space until January 8.As result,Jackey's accountant made a routine year-end accrual of $44,200 rent expense.Which of the following statements is true?
A)Jackey can deduct the $44,200 accrued rent expense.
B)Jackey can deduct the $44,200 expense in the year of payment.
C)The accrued rent expense results in a permanent book/tax difference.
D)The accrued rent expense results in a temporary book/tax difference.
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) Terrance Inc.,a calendar year taxpayer,purchased used equipment for $2,765,000 and placed it in service on March 4,2017.The equipment was seven-year recovery property and was the only depreciable asset that Terrance purchased during 2017. a.Compute Terrance's tax depreciation with respect to the equipment for 2017 and 2018. b.Compute Terrance's adjusted basis in the equipment on December 31,2018. c.How would your answer to a.change if the equipment was new instead of used?
Q2) Pettit Company purchased heavy equipment by giving the seller a $30,000 cash down payment and a 5-year interest-bearing note for the $170,000 balance of the price.Compute Pettit's book basis and tax basis in the equipment.
A)Book basis $30,000; tax basis $170,000
B)Book and tax basis $200,000
C)Book basis $200,000; tax basis $30,000
D)Book and tax basis $30,000
Q3) The capitalized cost of tangible leasehold improvements is amortizable over the term of the lease.
A)True
B)False
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Page 9
Chapter 8: Property Dispositions
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Sample Questions
Q1) Several years ago,Nipher paid $70,000 to purchase equipment to use in its business.This year,it sold the equipment for $76,500.Accumulated MACRS depreciation through date of sale was $18,000.Determine the amount and character of Nipher's gain recognized.
A)$24,500 ordinary gain
B)$24,500 Section 1231 gain
C)$18,000 ordinary gain and $6,500 capital gain
D)$18,000 ordinary gain and $6,500 Section 1231 gain
Q2) Which of the following results in a permanent book/tax difference for a corporate taxpayer?
A)Loss realized on a related party sale
B)Sale of a depreciable asset with a $100,000 book basis and a $33,600 adjusted tax basis
C)Gain recognized under the installment method
D)Net capital loss
Q3) Every gain or loss realized on the disposition of property is ultimately characterized as either ordinary or capital for tax purposes.
A)True
B)False
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Page 10
Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) A flood destroyed a business asset owned by Boochi Company.Boochi's adjusted tax basis in the asset was $87,100.Six months after the flood,Boochi used its $100,000 insurance settlement to replace the asset.Boochi can recognize a $12,900 gain or it can elect to defer gain recognition.
A)True
B)False
Q2) Which of the following statements about the wash sale rule is false?
A)The rule disallows loss recognition but not gain recognition.
B)The rule applies to both individual and corporate taxpayers.
C)The rule applies only to sales of marketable securities and not to sales of other types of investment assets.
D)None of the above is false.
Q3) Yelano Inc.exchanged an old forklift used in its business for a new forklift.This like-kind exchange is nontaxable.
A)True
B)False
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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Q1) Grant and Amy have formed a new business to be operated through an S corporation.They each own 50% of the corporation's outstanding common stock.During the first year of operations,the business incurred an operating loss of $100,000.In allocating this loss to the shareholders:
A)Grant and Amy must each be allocated $50,000 of the operating loss.
B)If the corporate charter permits,the S corporation can make a special allocation of 100% of the operating loss to Grant.
C)Because the shareholders have limited liability for the S corporation's debts,they are not permitted any deduction for the operating loss.
D)The corporation should also consider ownership of any outstanding preferred stock in making the loss allocation.
Q2) Martha Pim is a general partner in PLF Partnership.This year,Martha received a $48,000 guaranteed payment from PLF,and her distributive share of PLF's ordinary business income was $93,200.Which of the following is accurate?
A)Martha must pay income tax on $141,200 and self-employment tax on $48,000.
B)Martha must pay income tax on $141,200 and self-employment tax on $93,200.
C)Martha must pay both income tax and self-employment tax on $141,200.
D)Martha must pay income tax on $48,000 and self-employment tax on $93,200.
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Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) John's,Inc.manufactures and sells fine furniture.What is John's regular tax liability if it had taxable income of $40,000,000?
A)$14,000,000
B)$13,600,000
C)$15,600,000
D)$16,000,000
Q2) The corporate characteristic of limited liability is more important to the shareholders than the characteristic of centralized management.
A)True
B)False
Q3) 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
Q4) A nondeductible charitable contribution is a permanent book/tax difference.
A)True
B)False
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Chapter 12: The Choice of Business Entity
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Q1) Individual shareholders who create a brother-sister controlled group do not derive any federal tax advantage from doing so.
A)True
B)False
Q2) Glover,Inc.had $350,000 of taxable income,all of which was personal holding company income.The corporation paid a dividend of $350,000 in November.The corporation will owe a personal holding company tax for the year.
A)True
B)False
Q3) Because of conflicts of interest,shareholders are usually prohibited by law from serving as corporate officers and executives.
A)True
B)False
Q4) A family partnership can be used to shift a portion of the income from an accounting practice to a taxpayer's young children.
A)True
B)False
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Chapter 13: Jurisdictional Issues in Business Taxation
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Q1) The deemed paid foreign tax credit is available only to U.S.corporations that own 30% or more of the voting stock of a foreign corporation that paid dividends during the taxable year.
A)True
B)False
Q2) Chester,Inc.,a U.S.multinational,earns income in three foreign countries.Country A has a 25% income tax,Country B has a 35% income tax,and Country C has a 45% income tax.In which of these countries could Chester lower its world-wide tax liability by operating through a foreign subsidiary rather than a domestic subsidiary? Assume the foreign subsidiary will reinvest all after-tax earnings rather than paying dividends.
A)Country A
B)Country B
C)Country C
D)All three countries
Q3) Luttrix Inc.does business in Nebraska (6% tax rate)and Colorado (3% tax rate).All other factors being equal,Luttrix will reduce state taxes if it constructs a new manufacturing plant in Colorado.
A)True
B)False
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Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Which of the following situations result in a marriage penalty for federal income tax purposes?
A)Mr.and Mrs.Gooding,who have filed a joint return for 11 years,divorce before the end of the tax year.
B)Mr.Dylan,who is a head of household,marries Ms.Boyle,who has no taxable income,before the end of the tax year.
C)Mr.and Mrs.Small,who have filed a joint return for 20 years,elect to file separate tax returns this year.
D)Mr.Langley,a single taxpayer,marries Ms.Nuyen,also a single taxpayer.Both individuals earn a salary in excess of $100,000.
Q2) A husband and wife are allowed only one exemption on a jointly filed return.
A)True
B)False
Q3) Charlie is single and provides 100% of the financial support for his dependent mother,Angela,who lives with Charlie.Charlie's filing status is head of household.
A)True
B)False
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Page 16
Chapter 15: Compensation and Retirement Planning
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Q1) Which of the following statements regarding employee versus independent contractor status is false?
A)The determination as to whether a worker is an employee or an independent contractor is based on a subjective set of guidelines.
B)An employer has a financial incentive to classify a worker as an independent contractor instead of an employee.
C)The IRS has a higher probability of collecting income and payroll taxes from an independent contractor than from an employee.
D)If the IRS reclassifies a worker from independent contractor to employee,the employer can become liable for the employee's share of unpaid payroll taxes.
Q2) The 10% penalty imposed on premature withdrawals from qualified retirement plans is intended to discourage participants from withdrawing funds before retirement.
A)True
B)False
Q3) Unreimbursed moving expenses are a miscellaneous itemized deduction.
A)True
B)False
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Chapter 16: Investment and Personal Financial Planning
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Q1) This year,Mr.Chester gave $50,000 to an old friend who has no legal obligation to repay the money.The entire $50,000 is a taxable gift.
A)True
B)False
Q2) An owner of undeveloped land held for investment must capitalize the property taxes paid on the land each year.
A)True
B)False
Q3) Up to $100,000 of loss recognized on the sale of Section 1244 stock by a married individual filing a joint return is characterized as ordinary loss.
A)True
B)False
Q4) Lana owns 50 shares of stock qualifying as Section 1244 stock.If she sells the stock to George,he can also treat the stock as Section 1244 stock.
A)True
B)False
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Page 18
Chapter 17: Tax Consequences of Personal Activities
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Q1) A child of divorced parents is considered a dependent of the parent with custody unless that parent agrees to allow the noncustodial parent to claim the dependency exemption.
A)True
B)False
Q2) Mr.and Mrs.McGraw received $50,160 Social Security benefits this year.They also received $108,000 taxable pension payments and earned $47,300 interest and dividends from their investment portfolio.How much of the McGraw's Social Security is included in gross income?
A)$0
B)$25,080
C)$42,636
D)$50,160
Q3) Which of the following donations does not qualify as a charitable contribution for federal tax purposes?
A)$50 cash given to a homeless panhandler
B)Used furniture valued at $300 given to the Salvation Army
C)$3,000 cash given to the University of Georgia
D)$600 cash given to the Boy Scouts of America
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Page 19
Chapter 18: The Tax Compliance Process
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Q1) A person can't be relieved of liability for a tax deficiency under the innocent spouse rule unless that person was forced to sign the tax return under duress.
A)True
B)False
Q2) The IRS can't impose a negligence penalty on an individual who relied on the advice of a CPA in preparing his tax return.
A)True
B)False
Q3) The IRS who audited Mr.Kodak's 2014 Form 1040 assessed an $87,400 deficiency.If the agent believes that the entire deficiency was caused by Mr.Kodak's willful attempt to cheat the government,compute the resulting civil fraud penalty.
A)$17,480
B)$21,850
C)$65,550
D)None of the above
Q4) Only attorneys and CPAs may prepare tax returns for compensation.
A)True
B)False
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