Tax Policy and Administration
Solved Exam Questions
Course Introduction
This course explores the principles and practical challenges of designing and administering tax systems in diverse economic contexts. Students will examine the objectives of tax policy, including equity, efficiency, and economic growth, alongside the tools used to achieve these goals. The course addresses different forms of taxation, such as income, consumption, and property taxes, and considers the implications of tax incentives, evasion, and compliance. Through case studies and current events, students will analyze the roles of tax authorities, the impact of international tax standards, and reforms aimed at enhancing revenue mobilization and governance, preparing them to critically assess and contribute to effective tax administration and policy formulation.
Recommended Textbook Principles of Taxation for Business and Investment Planning 2016 19th Edition by Sally Jones
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Chapter 1: Taxes and Taxing Jurisdictions
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Sample Questions
Q1) Which of the following statements concerning judicial authority is false?
A) Appellate court decisions have more authority than trial court decisions.
B) Supreme Court decisions have more authority than appellate court decisions.
C) Supreme Court decisions are the equivalent of law.
D) None of the above statements is false.
Answer: D
Q2) The state of Virginia charges motorists 50 cents for every trip across a toll bridge over the James River. This charge is an example of a(n):
A) User's fee
B) Transaction-based tax
C) Activity-based tax
D) Excise tax
Answer: A
Q3) A business that operates in more than one state is required to pay state income tax only to the state in which it is incorporated.
A)True
B)False
Answer: False
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3
Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) According to supply-side economic theory, a decrease in tax rates for high-income individuals could actually cause an increase in tax revenue.
A)True
B)False
Answer: True
Q2) The sales tax laws of many states exempt the purchase of groceries and prescription drugs from tax. Such exemptions are intended to improve the:
A) Convenience of the tax
B) Equity of the tax
C) Sufficiency of the tax
D) Neutrality of the tax
Answer: B
Q3) Which of the following statements concerning tax preferences is false?
A) Tax preferences increase the complexity of the law.
B) Tax preferences raise additional revenue for the government.
C) Tax preferences are government subsidies for targeted taxpayer activities.
D) Tax preferences do not improve the accurate measurement of the tax base.
Answer: B
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4
Chapter 3: Taxes As Transaction Costs
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Sample Questions
Q1) Use the present value tables included in Appendix A of your textbook to compute the NPV of $12,500 received in year 5 at a 6% discount rate.
A) $8,745.5
B) $9,337.5
C) $9,900
D) None of the above
Answer: B
Q2) The arm's length transaction presumption is unreliable for transactions between related parties.
A)True
B)False
Answer: True
Q3) Mr. Jessel sold 4,200 shares of stock in a publicly held corporation through his stock broker. This transaction occurred in a private market.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) The business purpose doctrine allows the IRS to collapse a series of intermediate transactions into a single transaction to determine the tax consequences of the arrangement in its entirety.
A)True
B)False
Q2) Mrs. Stout has a $35,000 capital gain eligible for a 28% preferential tax rate. Which of the following statements is false?
A) If Mrs. Stout's regular marginal tax rate is 15%, she can elect to recharacterize the capital gain as ordinary income.
B) If Mrs. Stout's regular marginal tax rate is 25%, the preferential tax rate has no value to her.
C) If Mrs. Stout's regular marginal tax rate is 35%, the preferential tax rate saves her $2,450 in tax.
D) None of the above is false.
Q3) Municipal bond investments bear less implicit tax than investments in taxable corporate bonds.
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 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.
Q2) The U.S. Supreme Court:
A) Typically hears hundreds of tax cases each year.
B) May deny certiorari for a tax case because the court believes that the case involves a significant principle of law.
C) May grant certiorari for a tax case because two or more appellate courts have rendered conflicting opinions on the proper resolution of a tax issue.
D) Does not hear cases on tax issues.
Q3) Private letter rulings are authoritative only for the specific taxpayer to whom they are issued and cannot be relied on as authority by any other taxpayer.
A)True
B)False
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Chapter 6: Taxable Income From Business Operations
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Sample Questions
Q1) Which of the following does not result in a permanent book/tax difference?
A) Business meal and entertainment expense
B) Domestic production activities deduction
C) Premiums paid on key-person life insurance policies
D) All of the above result in a permanent book/tax difference.
Q2) Which of the following statements about methods of accounting is false?
A) The IRS has the right to determine if a taxpayer's method of accounting clearly reflects the taxpayer's income.
B) A taxpayer must request permission from the IRS to change its method of accounting for tax purposes.
C) A taxpayer engaged in more than one business can use a different method of accounting for each business.
D) Taxpayers must use the same method of accounting to compute taxable income as they use to compute financial statement income.
Q3) A permanent difference between book income and taxable income affects only one taxable year.
A)True
B)False
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) A basic premise of federal income tax law is that an expense is deductible unless the Internal Revenue Code specifically prohibits the deduction.
A)True
B)False
Q2) Poole Company made a $100,000 cash expenditure this year. Which of the following statements is false?
A) Poole must capitalize the expenditure if it creates a new asset that the company can use for the next four years.
B) Poole must capitalize the expenditure if it extends the estimated useful life of an existing asset by three years.
C) Poole must capitalize the expenditure if it results in a long-term economic benefit to the company.
D) None of the above is false.
Q3) Stanley Inc., a calendar year taxpayer, purchased a building and placed it in service on June 3. The MACRS depreciation calculation assumes that the building was placed in service on June 15.
A)True B)False
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Chapter 8: Property Dispositions
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Sample Questions
Q1) Lettuca Inc. generated a $77,050 ordinary loss from operations this year. It also recognized $5,920 recaptured ordinary income, $55,000 net Section 1231 loss, and $7,840 net capital loss on the sale of assets. Compute Lettuca's net operating loss.
A) $(77,050)
B) $(126,130)
C) $(132,050)
D) $(133,970)
Q2) Sandy Cole realized a loss on sale of an investment asset to her mother, Lynne. If the facts and circumstances prove that the selling price was an arm's length market price, Sandy can recognize the loss.
A)True
B)False
Q3) N&B Inc. sold land worth $385,000. The purchaser paid $80,000 cash and assumed N&B's $305,000 mortgage on the land. N&B's amount realized on sale is $385,000.
A)True
B)False
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Page 10
Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) Tibco Inc. exchanged an equity interest in ABM Partnership for an equity interest in Jolla Partnership. This exchange is taxable.
A)True
B)False
Q2) A taxpayer who exchanges property for an interest in a partnership never recognizes gain or loss on the exchange.
A)True B)False
Q3) Qualifying property received in a nontaxable exchange has a cost basis for tax purposes.
A)True
B)False
Q4) When unrelated parties agree to an exchange of noncash properties, the economic presumption is that the properties are of equal value.
A)True B)False
Q5) 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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Sample Questions
Q1) If a business is formed as an S corporation, its income may be subject to double taxation.
A)True
B)False
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.
Q3) Cramer Corporation and Mr. Chips formed a general partnership. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Mr. Chips' tax basis in its partnership interest?
A) $500,000
B) $1,200,000
C) $850,000
D) $650,000
Page 12
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Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) Corporations with taxable incomes in excess of $18,333,333 have a 35% marginal tax rate and a 35% average tax rate.
A)True
B)False
Q2) Doctors Inc. is a corporation owned by four physicians in which they operate their medical practice. For the current year, Doctors Inc. had taxable income of $135,000. What is its regular tax liability?
A) $32,450
B) $35,900
C) $45,900
D) $47,250
Q3) Fleet, Inc. owns 85% of the stock of Pete, Inc. and 35% of the stock of Zete, Inc. The remaining stock of Pete and Zete is owned by unrelated individuals. Which of the following statements is correct?
A) Fleet, Pete, and Zete are an affiliated group.
B) Fleet and Zete are an affiliated group.
C) Fleet and Pete are an affiliated group.
D) There is no affiliated group here.
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Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) A brother-sister controlled group consists of two or more corporations controlled by the same set of individual shareholders.
A)True
B)False
Q2) Which of the following is not a permissible reason for a regular corporation to accumulate earnings at the entity level and avoid the imposition of the accumulated earnings tax?
A) To construct a new plant facility in connection with expanding the corporation's business into a new geographic region
B) To accumulate a fund of cash with which to pay off long-term debt due in twenty years
C) To fund the development of a new product line
D) To invest in the stock of an unrelated company to take advantage of the dividends received deduction
Q3) Start-up losses of a new business operation can generate immediate tax savings if the business is operated as a corporation.
A)True
B)False
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14
Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) The income earned by a foreign branch operation of a U.S. corporation is taxable by the United States only when repatriated.
A)True
B)False
Q2) Which of the following entities is not subject to U.S. federal income tax?
A) U.S. corporation conducting 100 percent of its business outside the United States
B) Branch of U.S. corporation operating entirely in Germany
C) French subsidiary of U.S. parent operating entirely in France
D) Dutch corporation operating entirely within the United States
Q3) The payroll factor in the UDITPA state income tax apportionment formula always includes executive compensation.
A)True
B)False
Q4) 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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Page 15
Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Mr. Pearl's total income and self-employment tax on this year's Form 1040 is $72,610. If Mr. Pearl paid at least $65,349 of this tax in the form of withholding or quarterly estimated payments, he will not incur an underpayment penalty.
A)True
B)False
Q2) Kent, an unmarried individual, invited his widowed father, Martin, to move into his home in January of this year. Martin's only income item was a $14,000 taxable pension from his former employer. Kent provides about 75% of his father's financial support. What is Kent's filing status and number of exemptions for the year?
A) Single and one exemption
B) Single and two exemptions
C) Head of household and one exemption
D) Head of household and two exemptions
Q3) Mr. Andrews is age 58, legally blind, and files as a single taxpayer. His standard deduction for 2015 is $6,300.
A)True
B)False
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Page 16
Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) 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
Q2) Self-employed individuals have fewer opportunities than employees to underpay income and payroll taxes.
A)True
B)False
Q3) Section 401(k) plans allow employees to contribute a portion of their current wages or salary to a tax-exempt retirement account. However, the contributed portion is still taxable compensation to the employee.
A)True
B)False
Q4) An employer is allowed to deduct the accrued expense for the employer's liability to pay nonqualified deferred compensation.
A)True
B)False
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Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) Lindsey owns and actively manages an apartment complex. This year, the complex generated a $40,300 net loss. If Lindsey's AGI before considering this loss is $118,200 and she owns no other passive activities, how much of the loss is deductible this year?
A) $0
B) $9,100
C) $25,000
D) None of the above.
Q2) Individual taxpayers are not allowed to deduct capital losses in excess of capital gains.
A)True
B)False
Q3) Beverly earned a $75,000 salary and recognized a $7,200 loss on the sale of corporate stock this year. Compute her AGI in each of the following independent cases.
a. Beverly had no other capital transactions this year.
b. Beverly recognized a $13,500 capital gain on the sale of mutual fund shares.
c. Beverly received a $9,500 capital gain distribution from a mutual fund and had a $3,200 capital loss carryforward from a previous year.
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Chapter 17: Tax Consequences of Personal Activities
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Sample Questions
Q1) Mr. and Mrs. Nguyen, ages 71 and 61, reported $70,200 AGI and were allowed a $6,400 itemized medical expense deduction this year. Compute their medical expense deduction for alternative minimum tax (AMT) purposes.
A) $0
B) $4,645
C) $5,114
D) $6,300
Q2) 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
Q3) Unemployment benefits are excluded from gross income.
A)True
B)False
Q4) Congress provides an indirect subsidy to charities by allowing a deduction for charitable contributions.
A)True
B)False
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Chapter 18: The Tax Compliance Process
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Sample Questions
Q1) The IRS selects returns to audit that have the highest probability of generating additional revenue.
A)True
B)False
Q2) Mr. Beale prepared and signed his 2014 tax return on April 3, 2015. However, he carelessly forgot to mail the return until May 19. He enclosed his check for the $11,940 balance of tax due with the return. Compute Mr. Beale's late-filing and late-payment penalty.
Q3) Which of the following statements about the DIF score is true?
A) Details of the DIF score computation are available on the IRS website.
B) The lower the DIF score assigned to a tax return, the higher the probability that the return will be selected for audit.
C) The DIF score theoretically measures a tax return's potential for generating additional revenue on audit.
D) Taxpayers can contact the IRS to determine their DIF score before filing their annual tax return.
Q4) Only attorneys and CPAs may prepare tax returns for compensation.
A)True
B)False
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