Tax Research and Planning
Exam Materials
Course Introduction
Tax Research and Planning is a course designed to equip students with the foundational skills necessary for conducting effective tax research and developing tax planning strategies. The course covers the identification and interpretation of relevant tax laws, regulations, and authoritative sources, as well as the systematic approach to resolving complex tax issues. Students will learn how to utilize primary and secondary tax resources, apply advanced research methodologies, and communicate findings through clear, professional documentation. Emphasis is placed on the ethical considerations and practical implications of tax planning for individuals, corporations, and other entities, preparing students for real-world decision-making in the dynamic field of taxation.
Recommended Textbook
South Western Federal Taxation 2018 Comprehensive 41st Edition by William H. Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) A bribe to the local sheriff,although business related,is not deductible.
Answer: b
Q2) Two months after the burglary of his personal residence,Eric is audited by the IRS.Among the items taken in the burglary was a shoe box containing approximately $50,000 in cash.Eric is the owner and operator of a cash-and-carry liquor store.Eric wonders why he was audited.Can you help explain?
Answer: Although Eric's audit by the IRS could be the result of sheer chance,this appears unlikely.Press coverage of the burglary,particularly if the items stolen were enumerated,could have put the IRS on notice.Why would anyone keep such a large amount of cash at his personal residence? Also,Eric is in a business where tax evasion is easily accomplished.
Q3) When Congress enacts a tax cut that is phased in over a period of years,revenue neutrality is achieved.
A)True
B)False
Answer: False
Q4) Tax credits available for the purchase of a vehicle that uses alternative (non-fossil) fuels.
Answer: a
Page 3
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Chapter 2: Working With the Tax Law
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Q1) The research process should always begin with a tax service.
A)True
B)False Answer: False
Q2) The IRS is not required to make a letter ruling public.
A)True
B)False Answer: False
Q3) The Index to Federal Tax Articles (published by Thomson Reuters) is available electronically.
A)True
B)False Answer: False
Q4) Which of the following sources has the highest tax validity?
A)Revenue Ruling
B)Revenue Procedure
C)Regulations
D)Internal Revenue Code section
E)None of these
Answer: D
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Chapter 3: Computing the Tax
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Q1) Currently,the top income tax rate in effect is not the highest it has ever been.
A)True
B)False
Answer: True
Q2) During the current year,Doris received a large gift from her parents and a sizeable inheritance from an uncle.She also paid premiums on an insurance policy on her life.Doris is confused because she cannot find any place on Form 1040 to report these items.Explain.
Answer: Gifts and inheritances are exclusions from gross income.Like most exclusions,they are not reported on Form 1040.Premiums on a personal life insurance policy are nondeductible.Nondeductible items,such as these premiums,are not reported on Form 1040
Q3) Additional standard deduction
Answer: a
Q4) Scholarship funds for tuition
Answer: h
Q5) Tax Rate Schedule
Answer: h
Q6) Gain on collectibles (held more than one year)
Answer: j
Page 5
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Teal company is an accrual basis taxpayer.On December 1,2017,a customer paid for an item that was on hand,but the customer wanted the item delivered in early January 2018.Teal delivered the item on January 4,2018.Teal included the sale in its 2017 income for financial accounting purposes.
A)Teal must recognize the income in 2017.
B)Teal must recognize the income in the year title to the goods passed to the customer, as determined under the state laws in which the store is located.
C)Teal can elect to recognize the income in either 2017 or 2018.
D)Teal must recognize the income in 2018.
E)None of these.
Q2) Alvin is the sole shareholder of an S corporation that earned $200,000 in 2017 and distributed $75,000 to Alvin.Alvin must recognize $75,000 as income from the S corporation in 2017.
A)True
B)False
Q3) How does the taxation of Social Security benefits differ from the taxation of an annuity purchased by the taxpayer?
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Chapter 5: Gross Income: Exclusions
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Q1) Beverly died during the current year.At the time of her death,her accrued salary and commissions totaled $3,000 and were paid to her husband.The employer also paid the husband $35,000 which represented an amount equal to Beverly's salary for the year prior to her death.The employer had a policy of making the salary payments to "help out the family in the time of its greatest need." Beverly's spouse collected her interest in the employer's qualified profit sharing plan amounting to $30,000.As beneficiary of his wife's life insurance policy,Beverly's spouse elected to collect the proceeds in installments.In the year of death,he collected $8,000 which included $1,500 interest income.Which of these items are subject to income tax for Beverly's spouse?
Q2) The CEO of Cirtronics Inc.,discovered that the company's competitor had adopted a cafeteria plan for its employees.The CEO is concerned about retaining his talented employees and would like you to provide a brief explanation as to why a cafeteria plan may be attractive to the company's employees.
Q3) Workers' compensation benefits are included in gross income if the employer also pays the employee while the employee is recovering from his or her injury.
A)True
B)False
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Chapter 6: Deductions and Losses: in General
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Q1) Mitch is in the 28% tax bracket.He may receive a different tax benefit for a $2,000 expenditure that is classified as a deduction from AGI than he will receive for a $1,000 expenditure that is classified as a deduction for AGI.
A)True
B)False
Q2) Janet is the CEO for Silver,Inc.,a closely held corporation.Her total compensation for 2017 is $5 million.Of this amount,$2 million is a salary and $3 million is a bonus.The bonus was calculated as 5% of Silver's net income before the bonus and before taxes ($60 million × 5% = $3 million).The bonus provision has been in effect since Janet became CEO five years ago and is related to Silver's performance.It is approved annually by the entire board of directors (1 of the 5 directors is an outside director) of Silver.How much of Janet's compensation can Silver deduct for 2017?
Q3) Trade or business expenses are classified as deductions for AGI.Section 212 expenses,barring certain exceptions,are classified as deductions from AGI.What are these exceptions?
Q4) Assuming an activity is deemed to be a hobby,discuss the order and limits in which expenses must be deducted.
Q5) What losses are deductible by an individual taxpayer?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) On September 3,2016,Able,a single individual,purchased § 1244 stock in Red Corporation from his friend Al for $60,000.On December 31,2016,the stock was worth $85,000.On August 15,2017,Able was notified that the stock was worthless.How should Able report this item on his 2017 tax return?
A)$85,000 capital loss.
B)$85,000 ordinary loss.
C)$50,000 ordinary loss and $35,000 capital loss.
D)$60,000 ordinary loss.
E)None of the above.
Q2) When a nonbusiness casualty loss is spread between two taxable years,the loss in the second year is reduced by 10% of adjusted gross income for the first year.
A)True
B)False
Q3) The amount of a business loss cannot exceed the amount of the taxpayer's NOL for the taxable year.
A)True
B)False
Q4) Why was the domestic production activities deduction (DPAD) enacted by Congress?
Q5) How is qualified production activities income (QPAI) calculated?
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Q1) Discuss the criteria used to determine whether a building is residential or nonresidential realty.Also explain the tax consequences resulting from this determination if the property is placed in service in 2017.
Q2) White Company acquires a new machine (seven-year property) on January 10,2017,at a cost of $610,000.White makes the election to expense the maximum amount under § 179,and wants to take any additional first-year depreciation allowed.No election is made to use the straight-line method.Determine the total deductions in calculating taxable income related to the machine for 2017 assuming White has taxable income of $800,000.
A)$87,169
B)$348,585
C)$510,000
D)$524,290
E)None of the above
Q3) Intangible drilling costs must be capitalized and recovered through depletion. A)True B)False
Q4) Taxpayers may elect to use the straight-line method under MACRS for personalty. A)True B)False
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) Frank,a recently retired FBI agent,pays job search expenses to obtain a position with a city police department.Frank's job search expenses do qualify as deductions.
A)True
B)False
Q2) A taxpayer who uses the automatic mileage method for the business use of an automobile can change to the actual cost method in a later year.
A)True
B)False
Q3) Characteristic of a taxpayer who has the status of an employee
Q4) Time test (for moving expenses) waived
Q5) Myra's classification of those who work for her as independent contractors is being questioned by the IRS.It is the position of the IRS that these workers are really employees.What type of factors can Myra utilize to justify her classification?
Q6) Meg teaches the fifth grade at a local school.During the year,she spends $1,200 for school supplies for use in her classroom.On her income tax return,some of this expense is not reported and the balance is deducted in two different places.Explain what has probably happened.
Page 11
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) In the current year,Jerry pays $8,000 to become a charter member of Mammoth University's Athletic Council.The membership ensures that Jerry will receive choice seating at all of Mammoth's home basketball games.Also this year,Jerry pays $2,200 (the regular retail price) for season tickets for himself and his wife.For these items,how much qualifies as a charitable contribution?
A)$6,200
B)$6,400
C)$8,000
D)$10,200
E)None of the above
Q2) Jim's employer pays half of the premiums on a group medical insurance plan covering all employees,and employees pay the other half.Jim can exclude the half of the premium paid by his employer from his gross income and may include the half he pays in determining his medical expense deduction.
A)True
B)False
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Chapter 11: Investor Losses
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Q1) Ken has a $40,000 loss from an investment in a partnership in which he does not materially participate.He paid $30,000 for his interest.How much of the loss is disallowed by the at-risk rules? How much is disallowed by the passive activity loss rules?
Q2) Services performed by an employee are treated as being related to a real estate trade or business if the employee performing the services has more than a 5% ownership interest in the employer.
A)True
B)False
Q3) Significant participation activity.
Q4) If an owner participates for more than 500 hours in a bicycle rental activity located at a beach resort,any loss from that activity is treated as an active loss that can offset active income.
A)True
B)False
Q5) Linda owns investments that produce portfolio income and Activity A that produces losses.From a tax perspective,Linda will be better off if Activity A is not passive.
A)True
B)False
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Chapter 12: Tax Credits and Payments
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Q1) Child care payments to a relative are not eligible for the credit for child and dependent care expenses if the relative is a child (under age 19) of the taxpayer.
A)True
B)False
Q2) In terms of the withholding procedures,which statement does not reflect current rules?
A)Penalties can be imposed for filing false information with respect to wage withholding. B)An employer need not verify the number of exemptions claimed by an employee on Form W-4 (Employee's Withholding Allowance Certificate).
C)An employee may claim fewer than the number of withholding allowances allowed, but not more.
D)In preparing the income tax return for the year, the employee is bound by the number of exemptions claimed for withholding purposes.
Q3) Explain the purpose of the disabled access credit and describe the general characteristics of its computation.
Q4) Describe the withholding requirements applicable to employers.
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Chapter 13: Property Transactions: Determination of Gain or
Loss, basis Considerations, and Nontaxable Exchanges
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Q1) If the alternate valuation date is elected by the executor of the estate,the basis of all of the property included in the decedent's estate becomes the fair market value 6 months after the decedent's death.
A)True B)False
Q2) The carryover basis to a donee for property received by gift can be an amount greater than the donor's adjusted basis.
A)True B)False
Q3) Evelyn's office building is destroyed by fire on July 12,2017.The adjusted basis is $315,000.She receives insurance proceeds of $350,000 on August 31,2017.Calculate the amount that Evelyn must reinvest in qualifying property in order that her recognized gain be $20,000.Assume she elects § 1033 (nonrecognition of gain from an involuntary conversion) postponement treatment.
Q4) If property that has been converted from personal use to business use has appreciated in value,its basis for gain will be the same as the basis for loss.
A)True B)False
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Chapter 14: Property Transactions, capital Gains and
Losses, sec1231, and Recapture Provisions
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Q1) Michael is in the business of creating posters (display art) for the movie industry.He creates a poster and sells it for a lump sum.He has:
A)Sold a capital asset.
B)Sold an ordinary asset.
C)No gain or loss.
D)An ordinary gain.
E)b.and d.
Q2) Phil's father died on January 10,2017.The father had owned stock for 20 years with a basis of $45,000 that was transferred to Phil as a gift on August 10,2016,when the stock was worth $430,000.His father paid no gift taxes.This stock was worth $566,000 at the date of the father's death.Phil sold the stock for $545,000 net of commissions on February 23,2017.What is the amount and nature of Phil's gain or loss from disposition of this property?
Q3) Why is it generally better to have a net § 1231 gain year followed by a net § 1231 loss year rather than a net § 1231 loss year followed by a net § 1231 gain year?
Q4) If a capital asset is sold at a gain,the holding period is important.
A)True
B)False
Page 16
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Chapter 15: Alternative Minimum Tax
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Q1) Tad and Audria,who are married filing a joint return,have AMTI of $256,000 for 2017.Calculate their AMT exemption.
Q2) Prior to the effect of tax credits,Eunice's regular income tax liability is $325,000 and her tentative minimum tax 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
Q3) Assuming no phaseout,the AMT exemption amount for a married taxpayer filing separately for 2017 is more than the AMT exemption amount for C corporations.
A)True
B)False
Q4) Why is there a need for a second tax system called the alternative minimum tax?
Q5) Do AMT adjustments and AMT preferences increase or decrease AMTI?
Q6) C corporations are not required to make AMT adjustments for depreciation.
A)True
B)False
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Chapter 16: Accounting Periods and Methods
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Q1) In 2017,Godfrey received a $50,000 sales commission on a long-term contract.But in 2018,the customer filed bankruptcy and Godfrey's employer was not able to collect from the customer.Under the bonus agreement,Godfrey was required to repay the employer $20,000 of the bonus.Godfrey was in the 35% marginal tax bracket in 2017 but he is in the 25% marginal tax bracket in 2018.
A)Godfrey can amend his 2017 tax return and reduce his taxable income by $20,000.
B)Godfrey should deduct the $20,000 paid in 2018 and thus his tax savings will be $5,000.
C)Godfrey can reduce his 2018 tax liability by 35% × $20,000 = $7,000.
D)Godfrey should not have reported the income in 2017 because of the contingencies.
E)None of the above.
Q2) A C corporation's selection of a tax year,generally,is independent of the tax year of its principal shareholders.
A)True
B)False
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18
Chapter 17: Corporations: Introduction and Operating Rules
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Q1) A corporation with $5 million or more in assets must file Schedule M-3 (instead of Schedule M-1).
A)True
B)False
Q2) Employment taxes apply to all entity forms of operating a business.As a result,employment taxes are a neutral factor in selecting the most tax effective form of operating a business.
A)True
B)False
Q3) Pink,Inc.,a calendar year C corporation,manufactures golf gloves.For the current year,Pink had taxable income (before DPAD) of $900,000,qualified domestic production activities income of $750,000,and W-2 wages related to qualified production activities income of $140,000.Pink's domestic production activities deduction for the current year is: A)$0.
B)$12,600.
C)$67,500.
D)$70,000.
E)None of the above.
Q4) Briefly discuss the requirements for the dividends received deduction.
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Chapter 18: Corporations: Organization and Capital Structure
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Q1) Because services are not considered property under § 351,a taxpayer must report as income the fair market value of stock received for such services.
A)True
B)False
Q2) In a § 351 transaction,if a transferor receives consideration other than stock,the transaction can be taxable.
A)True
B)False
Q3) Tan Corporation desires to set up a manufacturing facility in the western part of the United States.After considerable negotiations with Butte,Montana,Tan accepts the following offer: land (fair market value of $4.5 million) and cash of $1.5 million.
a.How much income, if any, must Tan recognize?
b.What basis will Tan Corporation have in the land?
c.Within one year of the contribution, Tan purchases equipment for $1.6 million. What basis will Tan have in the equipment?
Q4) For transfers falling under § 351,what are the holding period rules for stock received by the shareholder and for the assets transferred to the corporation?
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Chapter 19: Corporations: Distributions Not in Complete
Liquidation
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Q1) Finch Corporation distributes property (basis of $225,000,fair market value of $300,000) to a shareholder in a distribution that is a qualifying stock redemption.The property is subject to a liability of $160,000,which the shareholder assumes.The basis of the property to the shareholder is:
A)$0.
B)$140,000.
C)$225,000.
D)$300,000.
E)None of the above.
Q2) Albatross Corporation acquired land for investment purposes in 2003 at a cost of $100,000.Albatross sold the land to Monty on December 30,2017,and did not elect out of the installment method of accounting.The selling price of the property was $400,000.Monty made a cash down payment of $50,000 on the date of sale and executed a $350,000 note,payable in seven annual installments of $50,000 each plus interest at the rate of 6% per annum.The first installment of $50,000 was due in 2018 which Monty paid,plus interest of $21,000.Discuss the effect of this sale on Albatross's taxable income and its E & P account in 2017 and 2018.
Q3) Gain realized,but not recognized,in a like-kind exchange transaction in 2017.
Q4) Federal income tax refunds from tax paid in prior years.
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganization
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Q1) Target shareholders recognize gain or loss when they receive assets (boot) as well as stock in the acquiring corporation in a transaction meeting the § 368 requirements.
A)True
B)False
Q2) If a liquidation qualifies under § 332,any minority shareholder will recognize gain or loss equal to the difference between the fair market value of assets received and the basis of the shareholder's stock.
A)True
B)False
Q3) Pursuant to a complete liquidation,Oriole Corporation distributes to its shareholders land with a basis of $350,000 and a fair market value of $800,000.The land is subject to a liability of $920,000.What is Oriole's recognized gain or loss on the distribution?
A)$0
B)$120,000 loss
C)$450,000 gain
D)$570,000 gain
E)None of the above
Q4) Discuss the role of letter rulings in corporate reorganizations.
Page 22
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Chapter 21: Partnerships
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Q1) Section 721 provides that no gain or loss is recognized on a contribution of property to a partnership in exchange for an interest in the partnership.An exception might apply if the taxpayer receives a cash distribution from the partnership soon after the property contribution is made.
A)True
B)False
Q2) Which of the following is a correct definition of a concept related to partnership taxation?
A)The aggregate concept treats partners and partnerships as separate units and gives the partnership its own tax "personality."
B)A partner's capital sharing ratio is defined as the percent of partnership assets (capital) that would be allocated to the partner upon liquidation of the partnership.
C)The partnership's outside basis is defined as the sum of each partner's capital account balance.
D)A special allocation is defined as an amount that could differently affect the tax liabilities of two or more partners.
Q3) Partner's capital account
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Chapter 22: S Corporations
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Q1) Distributions of appreciated property by an S corporation are not taxable to the entity.
A)True
B)False
Q2) During the year,Miles Nutt,the sole shareholder of a calendar year S corporation,received a distribution of $16,000.At the end of last year,his stock basis was $4,000.The corporation earned $11,000 ordinary income during the year.It has no accumulated E & P.Which statement is correct?
A)Nutt recognizes a $1,000 LTCG.
B)Nutt's stock basis is $2,000.
C)Nutt's ordinary income is $15,000.
D)Nutt's tax-free return of capital is $11,000.
Q3) As with partnerships,the income,deductions,and tax credits of an S corporation ____________________ to the shareholders annually.
Q4) Shareholders owning a(n) ____________________ of shares (voting and nonvoting) may ____________________ revoke an S election.
Q5) Form 1120S provides an S shareholder's computation of his or her stock basis.
A)True
B)False
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Chapter 23: Exempt Entities
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Q1) The excise tax imposed on a private foundation's investment income can be imposed as an initial (first-level) tax but cannot be imposed as an additional (second-level) tax.
A)True
B)False
Q2) Theater,Inc.,an exempt organization,owns a printing company,Printers,Inc.,which remits 85% of its profits to Theater,Inc.Since Printers remits at least 85% of its profits to Theater,neither Theater,Inc.,nor Printers,Inc.,must pay income tax on this $85,000 ($100,000 × 85%).
A)True
B)False
Q3) The trade or business is not substantially related to the exempt purpose of the organization.
Q4) Form 990.
Q5) Membership lists
Q6) Private foundation
Q7) Describe how an exempt organization can be eligible to make lobbying expenditures without losing its tax exemption.
Q8) Form 990-PF.
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Chapter 24: Multistate Corporate Taxation
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Q1) Several states allow the S corporation to file a(n) ____________________ income tax return,usually in the form of a state-by-state spreadsheet,on behalf of its out-of-state shareholders.
Q2) Sales/use tax in most states applies to a restaurant meal.
A)True
B)False
Q3) Generally,nonapportionable income includes:
A)Sales of products manufactured by the taxpayer.
B)License fees for intangible assets collected by the taxpayer.
C)Both a.and b.
D)Neither a.nor b.
Q4) ____________________ describe(s) the degree of business activity that must be present before a taxing jurisdiction has the right to impose a tax on an out-of-state entity's income.
Q5) Typically included in the sales/use tax base is the purchase of tablet computers and cell phone equipment by a large manufacturing firm,whose sales force uses the items.
A)True B)False
Q6) Q adopts a throwback rule.
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Chapter 25: Taxation of International Transactions
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Q1) Your client holds foreign tax credit (FTC) carryforwards,i.e.,it is in an "excess credit" position.Give at least three planning ideas that the client should implement,so as to free up the suspended FTCs.
Q2) Which of the following statements regarding a non-U.S.person's U.S.tax consequences is true?
A)Non-U.S. persons may be subject to U.S. withholding tax on U.S.-source investment income.
B)Non-U.S. individuals may be subject to U.S. income tax but non-U.S. corporations are never subject to U.S. income tax.
C)Non-U.S. persons are only subject to U.S. income or withholding tax if engaged in a U.S. trade or business.
D)Non-U.S. persons must be physically present in the United States before any U.S.-source income is subject to U.S. income or withholding tax.
Q3) When a business taxpayer "goes international," the first step usually is to create an overseas branch sales office.
A)True B)False
Q4) Number of foreign tax credit limitation baskets.
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Page 27
Chapter 26: Tax Practice and Ethics
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183 Verified Questions
183 Flashcards
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Sample Questions
Q1) Misstatement of withholding allowances.
Q2) CPA Liam discovers that last year's Form 1120 for his client PollCo claimed a $100,000 advertising deduction for a gift to candidates of the Green Party.AICPA tax ethics rules require that an amended return immediately be filed,as political expenditures are not deductible.
A)True
B)False
Q3) It typically is advisable that an IRS audit be conducted at the office of the tax advisor,and not of the client.
A)True
B)False
Q4) Failure to deposit withholding tax.
Q5) Malik,Inc.,a calendar year C corporation subject to a 35% marginal income tax rate,claimed a Form 1120 charitable contribution deduction of $30,000 for a sculpture that the IRS later valued at $10,000.The applicable overvaluation penalty is:
A)$0.
B)$7,000.
C)$10,000 (minimum penalty).
D)$20,000.
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Chapter 27: The Federal Gift and Estate Taxes
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167 Verified Questions
167 Flashcards
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Sample Questions
Q1) Which,if any,of the following statements correctly reflects the rules applicable to the alternate valuation date?
A)The election is made by the executor.
B)Can be elected even though no estate tax return has to be filed.
C)Can be elected only if it reduces the amount of the gross estate or reduces the estate tax liability.
D)Its election does not affect the income tax basis of property included in the gross estate.
Q2) Stacey inherits unimproved land (fair market value of $6 million) from her father on June 1,2017.Stacey disclaims her interest in the property as follows: one-third on December 1,2017; one-third on January 3,2018; and the remaining one-third on May 31,2018.In all cases,the disclaimers pass the interest to her son (the next heir under state law).The Federal gift tax applies to Stacey for:
A)All of the disclaimers.
B)The disclaimer made in 2017.
C)The May 31, 2018 disclaimer.
D)All of the disclaimers made in 2018.
E)None of the disclaimers.
Q3) Joint tenancy
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Page 29
Chapter 28: Income Taxation of Trusts and Estates
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167 Verified Questions
167 Flashcards
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Sample Questions
Q1) Corpus,principal,and assets of the trust are synonyms.
A)True
B)False
Q2) A synonym for executor.
Q3) The Form 1041 of a calendar-year trust is due on ____________________ 15 (not including extensions) of the following year.
Q4) A fiduciary's distribution deduction shifts the tax burden for the distributed amount of current-year income from the entity to the beneficiary.
A)True
B)False
Q5) The Jiang Trust manages investment assets that were contributed by Kong several years ago.The trust distributed one-half of its DNI this year to Kong.Kong can retain all of the trust's tax-exempt interest income if:
A)One-half of the exempt income belongs to the trust. No special allocations are allowed by Subchapter J.
B)Jiang is in a higher income tax bracket than is Kong.
C)Kong is in a higher income tax bracket than is the trust.
D)The tax-exempt bonds were contributed by Kong when the trust was created.
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