Tax Policy
Mock Exam
Course Introduction
Tax Policy examines the principles, design, and effects of tax systems in national and global contexts. The course explores the economic, legal, and administrative foundations of taxation, including personal and corporate income taxes, consumption taxes, and property taxes. Students analyze the objectives and trade-offs inherent in tax policy such as equity, efficiency, simplicity, and revenue generation while considering current policy debates and reforms. Through case studies and policy analysis, participants gain a comprehensive understanding of the role taxes play in fiscal policy, income redistribution, economic development, and government budgeting.
Recommended Textbook McGraw Hills Taxation of Individuals and Business Entities 6th Edition by Spilker
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Chapter 1: An Introduction to Tax
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Sample Questions
Q1) Which of the following is considered a tax?
A) Tolls
B) Parking meter fees
C) Annual licensing fees
D) A local surcharge paid on retail sales to fund public schools
E) Entrance fees paid at national parks
Answer: D
Q2) To calculate a tax, you need to know: I. the tax base
II) the taxing agency
III) the tax rate
IV) the purpose of the tax
A) Only I is correct
B) Only IV is correct
C) Only III is correct
D) Items I through IV are correct
E) I and III are correct
Answer: E
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Chapter 2: Tax Compliance, the Irs, and Tax Authorities
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Sample Questions
Q1) Which of the following is not considered a secondary authority?
A) Text book
B) Private letter ruling
C) Tax article
D) Tax service
E) None of these.
Answer: B
Q2) In researching a question of fact, the researcher will focus her efforts on identifying authorities with fact patterns similar to her client's facts.
A)True
B)False
Answer: True
Q3) Closed facts are especially conducive to tax planning.
A)True
B)False
Answer: False
Q4) Office examinations are the most common type of IRS audit.
A)True
B)False
Answer: False
Page 4
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Chapter 3: Tax Planning Strategies and Related Limitations
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Sample Questions
Q1) Which of the following is an example of the conversion strategy?
A) A corporation paying its shareholders a $20,000 dividend
B) A corporation paying its owner a $20,000 salary
C) A high tax rate taxpayer investing in tax exempt municipal bonds
D) A cash-basis business delaying billing its customers until after year end
E) None of these
Answer: C
Q2) Danny argues that tax accountants suffer from one-mindedness in their attempts at tax planning (i.e., reducing taxes at all costs). Is Danny's view of tax planning correct - i.e., does he understand what the goal of tax planning is? Please elaborate. Answer: Danny has an incomplete view of the goals of tax planning. In general terms, the goal of tax planning is to maximize the taxpayer's after-tax wealth while simultaneously achieving the taxpayer's nontax goals. Maximizing after-tax wealth is not necessarily the same as tax minimization. Specifically, maximizing after-tax wealth requires one to consider both the tax and nontax costs and benefits of alternative transactions, whereas tax minimization focuses solely on a single cost (i.e., taxes). Indeed, if the goal of tax planning were simply to minimize taxes, the simplest way to achieve this goal would be to earn no income at all.
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Chapter 4: Individual Income Tax Overview, Exemptions, and Filing Status
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Sample Questions
Q1) For AGI deductions are commonly referred to as deductions "below the line."
A)True
B)False
Q2) Anna is a 21-year-old full-time college student (she plans on returning home at the end of the school year). Her total support for the year was $34,000 (including $8,000 of tuition). Anna covered $12,000 of her support costs out of her own pocket (from savings, she did not work) and she received an $8,000 scholarship that covered all of her tuition costs. Which of the following statements regarding who is allowed to claim Anna as an exemption is true?
A) Even if Anna's parents provided the remaining $14,000 of support for Anna ($34,000 minus $12,000 minus $8,000), they would not be able to claim her as a dependent.
B) Even if Anna's grandparents provided the remaining $14,000 of support for Anna ($34,000 minus $12,000 minus $8,000) they would not be able to claim her as a dependent.
C) Because she provided more than half her own support, Anna may claim a personal exemption for herself.
D) None of these statements is true.
Q3) What is the couple's gross income?
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Chapter 5: Gross Income and Exclusions
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Sample Questions
Q1) The tax law defines alimony to include transfers of property (but not cash) between former spouses.
A)True
B)False
Q2) Andres has received the following benefits this year. \(\begin{array} { l r }
\text { Salary } & \$ 92,000 \\
\text { Contribution to qualified pension plan } & 10,200 \\
\text { Qualified health insurance premiums } & 8,400 \\
\text { Year-end bonus } & 15,000 \\
\text { Group-term life insurance premiums (face } = \$ 40,000 ) & 1,750 \\
\text { Whole life insurance premiums (face } = \$ 100,000 ) & 2,420 \\
\text { Disability insurance premiums } & 1,800
\end{array}\) Besides these benefits Andres missed work for two months due to an illness. During his illness Andres received $6,500 in sick pay from a disability insurance policy. Assume Andres has disability insurance provided by his employer as a nontaxable fringe benefit. What amount, if any, must Andres include in gross income this year?
Q3) Worker's compensation benefits are excluded from gross income.
A)True
B)False
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Chapter 6: Individual Deductions
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Sample Questions
Q1) Which of the following is a true statement?
A) For purposes of the deduction for educational interest, expenses do not include expenses for room, board and travel.
B) For purposes of the deduction for educational interest, qualified education expenses are those paid for the education of the taxpayer, the taxpayer's spouse, or a taxpayer's dependent.
C) The maximum deduction for interest expense on qualified education loans is $6,000.
D) A penalty paid for prematurely withdrawing a certificate of deposit or similar deposit is deductible as an investment expense.
E) All of these are false.
Q2) The phrase "ordinary and necessary" means that an expense must be appropriate and helpful for generating a profit.
A)True
B)False
Q3) Last year Henry borrowed $15,000 to help pay for his dependent daughter's college tuition. This year Henry paid $2,800 of interest on the loan. How much, if any, interest can Henry deduct if he files single with AGI of $72,500?
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Page 8
Chapter 7: Individual Income Tax Computation and Tax Credits
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Sample Questions
Q1) Tamra and Jacob are married and they file a joint tax return. Tamra received nearly five times the salary that Jacob received. Which of the following statements is true?
A) Tamra and Jacob likely pay no tax marriage penalty nor receive a tax marriage benefit.
B) Tamra and Jacob likely pay a tax marriage penalty.
C) Tamra and Jacob likely receive a tax marriage benefit.
D) Tamra and Jacob likely will pay a tax marriage penalty and receive a tax marriage benefit.
Q2) To qualify for the earned income credit, the taxpayer must have a qualified dependent.
A)True
B)False
Q3) Which of the following tax credits is fully refundable?
A) American opportunity credit
B) Dependent care credit
C) Earned income credit
D) None of these
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Page 9
Chapter 8: Business Income, Deductions, and Accounting Methods
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Q1) A loss deduction from a casualty of a business asset is only available if the asset is completely destroyed.
A)True
B)False
Q2) Which of the following is likely to be a fully deductible business expense?
A) Salaries in excess of the industry average paid to attract talented employees.
B) The cost of employee uniforms that can be adapted to ordinary personal wear.
C) A speeding fine paid by a trucker who was delivering a rush order.
D) The cost of a three-year subscription to a business publication.
E) None of these is likely to be deductible.
Q3) Which of the following is a true statement about travel that has both business and personal aspects?
A) Transportation costs are always fully deductible.
B) Meals are not deductible for this type of travel.
C) Only half of the cost of meals and transportation is deductible.
D) The cost of lodging, and incidental expenditures is limited to those incurred during the business portion of the travel.
E) None of these
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Chapter 9: Property Acquisition and Cost Recovery
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Sample Questions
Q1) An asset's capitalized cost basis includes only the actual purchase price; whereas the other expenses associated with the asset are immediately expensed.
A)True
B)False
Q2) Suvi, Inc. purchased two assets during the current year. Suvi placed in service computer equipment (5-year property) on August 10 with a basis of $20,000 and machinery (7-year property) on November 18 with a basis of $10,000. Calculate the maximum depreciation expense, rounded to a whole number (ignoring §179 and bonus depreciation):
A) $857
B) $3,357
C) $5,429
D) $6,000
E) None of these
Q3) The MACRS depreciation tables automatically switch to the straight-line method when it exceeds the declining balance method.
A)True
B)False
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Chapter 10: Property Dispositions
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Sample Questions
Q1) Alpha sold machinery, which it used in its business, to Beta, a related entity, for $40,000. Beta used the machinery in its business. Alpha bought the equipment a few years ago for $50,000 and has claimed $30,000 of depreciation expense. What is the amount and character of Alpha's gain?
A) $20,000 ordinary income under §1239.
B) $10,000 ordinary gain and $10,000 §1231 gain.
C) $20,000 ordinary gain.
D) $20,000 capital gain.
E) None of these.
Q2) An installment sale is any sale where at least a portion of the sales proceeds is recognized in a subsequent taxable year.
A)True
B)False
Q3) In the current year, Raven sold machinery with a fair market value of $200,000. The machinery's original basis was $190,000 and Raven's accumulated depreciation on the machinery was $40,000, so its adjusted basis to Raven was $150,000. Raven received $50,000 in the current year and a note paying Raven $75,000 a year for two years beginning in next year. What is the amount and character of the gain that Raven will recognize in the current year?
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Page 12
Chapter 11: Investments
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Sample Questions
Q1) Susan Brown has decided that she would like to go back to school after her kids leave home in five years. To save for her education, Susan would like to invest $25,000 in an investment that provides a high return. If her marginal tax rate is 35 percent, what is Susan's after-tax rate of return for the following investment options?
(1) Corporate bond issued at face value with 10 percent stated interest rate payable annually
(2) Dividend-paying stock with an annual qualifying dividend equal to 10% of her investment
(3) Growth stock with an annual growth rate of 8 percent and no dividends paid
(4) Municipal bond yielding a 6 percent annual return
(5) 529 plan with 7 percent annual return (all disbursements will be spent on qualifying educational expenses).
(Round your interim calculations to the nearest whole number)
Q2) Which of the following types of interest income is not taxed as it is earned?
A) interest from savings accounts
B) original issue discounts on corporate bonds
C) accrued market discount on bonds
D) interest from money market accounts
E) All of these
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Page 13
Chapter 12: Compensation
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Sample Questions
Q1) When stock options are exercised they are converted into actual employer stock.
A)True
B)False
Q2) Rachel receives employer provided health insurance. The employer's cost of the health insurance is $6,000 annually. What is her employer's after-tax cost of providing the health insurance, assuming that the employer's marginal tax rate is 35 percent?
A) $0
B) $3,900
C) $4,198
D) $6,000
Q3) Which of the following isn't done by Form W-2?
A) Summarizes the employee's taxable salary and wages.
B) Provides annual Federal and state withholding information.
C) Indicates whether an employee had more than one employer during the year.
D) Generated by an employer annually.
Q4) Employers always prefer to award incentive stock options rather than nonqualified stock options.
A)True
B)False
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Chapter 13: Retirement Savings and Deferred Compensation
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Sample Questions
Q1) Cassandra, age 33, has made deductible contributions to her traditional IRA over the years. When the balance in her IRA was $40,000, Cassandra received a distribution of $34,000 from her IRA in order to purchase a new car. How much of the $34,000 distribution will she have remaining after paying income taxes and early distribution penalties on the distribution? Her marginal tax rate is 25 percent.
Q2) Riley participates in his employer's 401(k) plan. He turns 70 years of age on February 15, 2013 and he plans on retiring on July 1, 2015. When must Riley receive his first distribution from the plan to avoid minimum distribution penalties?
A) by April 1, 2013
B) by April 1, 2014
C) by April 1, 2015
D) by April 1, 2016
Q3) Gordon is a 52-year-old self-employed contractor (no employees). During 2014, his Schedule C net income was $88,000. What is the maximum amount that Gordon can contribute to (1) a SEP IRA and (2) an individual 401(k)? (Round your answers to the nearest whole number).
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Chapter 14: Tax Consequences of Home Ownership
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Q1) Renting a residence may have nontax advantages over owning a home.
A)True
B)False
Q2) Heidi (single) purchased a home on January 1, 2005 for $400,000. She lived in the home as her primary residence until January 1, 2012 when she began using the home as a vacation home. She used the home as a vacation home until January 1, 2013 (she used a different home as her primary residence from January 1, 2012 to January 1, 2013). On January 1, 2013, Heidi moved back into the home and used it as her primary residence until January 1, 2014 when she sold the home for $700,000. What amount of the $300,000 gain Heidi realized on the sale must she recognize for tax purposes in 2014?
Q3) What is the maximum amount of gain on the sale of principal residence a married couple may exclude from gross income?
A) $0
B) $25,000
C) $250,000
D) $500,000
Q4) A tax loss from a rental home is a passive activity loss.
A)True
B)False
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Chapter 15: Entities Overview
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Q1) Which of the following is not an effective strategy for mitigating double taxation in a C corporation?
A) C corporations can shift income to shareholders via deductible payments
B) C corporations can make an S election
C) C corporations can pay dividends to their shareholders
D) None of these. All of these statements are effective strategies to mitigate or avoid double taxation.
Q2) Corporations are legally formed by filing articles of organization with the state in which the corporation will be created.
A)True
B)False
Q3) C corporations and S corporations are separate taxpaying entities that pay tax on their own income.
A)True
B)False
Q4) For tax purposes, only unincorporated entities can be considered to be disregarded entities.
A)True
B)False
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Chapter 16: Corporate Operations
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Q1) A C corporation reports its taxable income or loss on Form 1065.
A)True
B)False
Q2) During 2014, Hughes Corporation sold a portfolio of stock it had held for five years at a loss of $200,000. It also sold some investment land and recognized a capital gain of $180,000. In 2012, Hughes reported a net capital gain of $12,000 and in 2013 it recognized a net capital gain of $6,000. What is the amount of its net capital loss carryover to 2015?
Q3) GenerUs Inc.'s board of directors approved a charitable cash contribution to FoodBank, a qualified non-profit organization, in November of 2014. GenerUs made payment to FoodBank on February 2, 2015. GenerUs Inc. (a calendar-year corporation) may claim a deduction for the contribution on its 2014 tax return.
A)True
B)False
Q4) Which of the following is not calculated in the corporate income tax formula?
A) Gross income
B) Adjusted gross income
C) Taxable income
D) Regular tax liability
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Page 18
Chapter 17: Accounting for Income Taxes
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Q1) Costello Corporation reported pretax book income of $500,000. During the current year, the reserve for bad debts increased by $5,000. In addition, tax depreciation exceeded book depreciation by $40,000. Finally, Costello received $3,000 of tax-exempt life insurance proceeds from the death of one of its officers. Using a tax rate of 34%, Costello's deferred income tax expense or benefit would be:
A) $11,900 net deferred tax expense
B) $11,900 net deferred tax benefit
C) $15,300 net deferred tax benefit
D) $15,300 net deferred tax expense
Q2) A corporation evaluates the need for a valuation allowance by comparing both positive and negative evidence that the corporation will realize a deferred tax asset in the future.
A)True
B)False
Q3) The Emerging Issues Task Force assists the FASB by providing guidance on the implementation of ASC 740 and other accounting pronouncements.
A)True
B)False
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Page 19
Chapter 18: Corporate Taxation: Nonliquidating Distributions
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Sample Questions
Q1) Wonder Corporation declared a common stock dividend to all shareholders of record on September 30, 20X3. Shareholders will receive three shares of Wonder stock for each five shares of stock they already own. Diana owns 300 shares of Wonder stock with a tax basis of $90 per share (a total basis of $27,000). The fair market value of the Wonder stock was $180 per share on September 30, 20X3. What are the tax consequences of the stock dividend to Diana?
A) $0 dividend income and a tax basis in the new stock of $180 per share
B) $0 dividend income and a tax basis in the new stock of $67.50 per share
C) $0 dividend income and a tax basis in the new stock of $56.25 per share
D) $10,800 dividend and a tax basis in the new stock of $180 per share
Q2) A distribution in partial liquidation of a corporation is always treated as a sale or exchange by an individual shareholder.
A)True
B)False
Q3) Compensation recharacterized by the IRS as a dividend because it was considered "unreasonable" will affect only the income tax liability of the corporation paying the compensation.
A)True
B)False
Page 20
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Chapter 19: Corporate Formation, Reorganization, and Liquidation
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Q1) Rachelle transfers property with a tax basis of $800 and a fair market value of $900 to a corporation in exchange for stock with a fair market value of $750 and $50 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is Rachelle's tax basis in the stock received in the exchange?
A) $900
B) $850
C) $750
D) $700
Q2) A Type A reorganization deals with the transfer of assets by the target corporation in a merger.
A)True
B)False
Q3) The definition of property as it relates to a section 351 transaction includes money. A)True
B)False
Q4) Gain or loss is always recognized when realized for tax purposes. A)True
B)False
21
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Chapter 20: Forming and Operating Partnerships
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Q1) A partnership can elect to amortize organization and startup costs; however, syndication costs are not deductible.
A)True
B)False
Q2) A partner can apply any passive activity losses against any passive activity income for the year.
A)True
B)False
Q3) Gerald received a 33% capital and profit (loss) interest in XYZ Limited Partnership (LP). In exchange for this interest, Gerald contributed a building with a FMV of $30,000. His adjusted basis in the building was $15,000. In addition, the building was encumbered with a $9,000 nonrecourse mortgage that XYZ, LP assumed at the time the property was contributed. What is Gerald's outside basis immediately after his contribution?
A) $6,000
B) $9,000
C) $21,000
D) $24,000
Q4) What is the difference between a partner's tax basis and at-risk amount?
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Page 22
Chapter 21: Dispositions of Partnership Interests and Partnership Distributions
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Q1) A partner will recognize a loss from a liquidating distribution when the distribution includes only cash, unrealized receivables, and inventory and the partner's outside basis is less than the sum of the bases of the distributed assets.
A)True
B)False
Q2) Marcella has a $65,000 basis in her 50% partnership interest in the JM Partnership before receiving any distributions. This year JM makes a proportionate current distribution to Marcella of $10,000 cash and inventory with an $80,000 fair value and a $40,000 basis to JM. What is Marcella's basis in the inventory and her remaining basis in JM after the distribution?
A) $80,000 inventory basis, $0 JM basis
B) $40,000 inventory basis, $0 JM basis
C) $40,000 inventory basis, $15,000 JM basis
D) $80,000 inventory basis, $15,000 JM basis
Q3) The purpose of hot asset rules is to ensure that selling partners recognize all gain or loss on the sale of their partnership interests as capital.
A)True
B)False
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Chapter 22: S Corporations
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Q1) In general, an S corporation shareholder makes increasing adjustments to her basis first, followed by adjustments that decrease basis.
A)True
B)False
Q2) At the beginning of the year, Harold, Missy, and Ranae formed HMR Corporation as an S corporation. For one-third of the HMR stock, Harold contributed $50,000 cash and land with a fair market value of $75,000 and adjusted tax basis of $60,000. The land was subject to a $45,000 mortgage, which was assumed by HMR on the formation. Missy and Ranae each contributed $80,000 cash to HMR for one-third of the HMR stock. What is Harold's basis in the HMR stock after the formation? What is Missy's basis in her HMR stock after the formation?
Q3) S corporation distributions are not taxable to the extent of stock and debt basis.
A)True B)False
Q4) Distributions to owners may not cause the AAA to go negative or to become more negative.
A)True B)False
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Page 24
Chapter 23: State and Local Taxes
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Sample Questions
Q1) 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. Determine the sales and use tax liability that the Shop must collect and remit if it sells a $1,000 racquet order to an Alaska customer (assume the Shop has no sales personnel or property in Alaska) that purchases the merchandise over the internet?
Q2) Many states are expanding the types of services subject to sales tax.
A)True
B)False
Q3) All states employ some combination of sales and use tax, income or franchise tax, or property tax.
A)True
B)False
Q4) The payroll factor includes payments to independent contractors.
A)True
B)False
Q5) The trade-show rule allows businesses to maintain a sample room for up to four weeks per year.
A)True
B)False
25
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Chapter 24: The US Taxation of Multinational Transactions
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Q1) Portsmouth Corporation, a British corporation, is a wholly owned subsidiary of Salem Corporation, a U.S. corporation. During the year, Portsmouth reported the following income:
$250,000 interest income received from a loan to an unrelated French corporation
$100,000 dividend income received from a less than 1 percent owned unrelated Dutch corporation
$150,000 rent income from an unrelated British corporation on property Portsmouth actively manages
$500,000 gross profit from the sale of inventory manufactured by Portsmouth in Great Britain and sold to a 100 percent owned subsidiary in Germany. What amount of subpart F income does Portsmouth recognize in the current year?
Q2) Philippe is a French citizen. During 2014 he spent 150 days in the United States on business. Because Philippe does not spend 183 days in the United States in 2014, he will not be treated as a resident alien for U.S. tax purposes.
A)True
B)False
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Chapter 25: Transfer Taxes and Wealth Planning of the Cfa Institute
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Q1) A fiduciary is a legal entity that can only exist for a year.
A)True
B)False
Q2) The gift-splitting election only applies to gifts made by taxpayers who reside in community property states.
A)True
B)False
Q3) This year Nathan transferred $2 million to an irrevocable trust established for the benefit of his nephew. The trustee is directed to accumulate income for the next 5 years before distributing the trust corpus to Nathan's nephew. In past years Nathan has made taxable gifts of $6 million and used a unified credit on an exemption equivalent of $5 million. What amount of gift tax, if any, must Nathan remit?
A) $300,000
B) $400,000
C) $345,450
D) zero - there is a $10.68 million exemption equivalent
E) None of these.
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Page 27