Tax Research
Midterm Exam
Course Introduction
Tax Research is a course designed to equip students with the skills necessary to effectively identify, interpret, and apply relevant tax authorities to real-world tax issues. The course covers primary and secondary tax sources, including the Internal Revenue Code, Treasury regulations, and case law, as well as official IRS pronouncements.
Students will learn to use electronic tax research databases, analyze complex transactions, and communicate findings through written memoranda and client letters.
Emphasis is placed on ethical considerations and professional standards in tax practice, preparing students to address contemporary tax questions with confidence and accuracy.
Recommended Textbook
South Western Federal Taxation 2013 Comprehensive Edition by William H. Hoffman
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28 Chapters
3604 Verified Questions
3604 Flashcards
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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159 Verified Questions
159 Flashcards
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Sample Questions
Q1) Social considerations can be used to justify:
A)Allowance of a credit for child care expenses.
B)Allowing excess capital losses to be carried over to other years.
C)Allowing accelerated amortization for the cost of installing pollution control facilities.
D)Allowing a Federal income tax deduction for state and local sales taxes.
E)None of the above.
Answer: A
Q2) When a state decouples from a Federal tax provision, it means that this provision will not apply for state income tax purposes.
A)True
B)False
Answer: True
Q3) Noah dies in 2012 with an estate worth $12 million.Under his will, $6 million passes to his wife while $6 million goes to his church.What is Noah's Federal estate tax result?
Answer: None. After a marital deduction of $6 million and a charitable deduction of $6 million, Noah's taxable estate is $0.
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Page 3
Chapter 2: Working With the Tax Law
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Sample Questions
Q1) Tax research involves which of the following procedures:
A)Identifying and refining the problem.
B)Locating the appropriate tax law sources.
C)Assessing the validity of the tax law sources.
D)Follow-up.
E)All of the above.
Answer: E
Q2) The "respondent" refers to the party against whom a suit is brought.
A)True
B)False
Answer: True
Q3) Where can a researcher not find a U.S. Court of Appeals decision?
A) Federal 3d (West).
B) F. Supp. 2d Series (West).
C) AFTR (RIA).
D) USTC (CCH).
E) None of the above.
Answer: B
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4
Chapter 3: Computing the Tax
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Sample Questions
Q1) Monique is a resident of the U.S.and a citizen of France. If she files a U.S.income tax return, Monique can claim the standard deduction.
A)True
B)False
Answer: True
Q2) The major advantage of being classified as an abandoned spouse is that the taxpayer is treated for tax purposes as being single and not married.This means that an abandoned spouse can use the more favorable tax rates available to single persons than those available to married persons filing separately.Comment on the accuracy of this conclusion.
Answer: The conclusion is incorrect.The classification of abandoned spouse allows the taxpayer to the use of the rates for head of household filing status which are less progressive than married filing separately.
Q3) In terms of timing as to any one year, the Tax Tables are available before the Tax Rate Schedules.
A)True
B)False
Answer: False
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5
Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) The taxable portion of Social Security benefits is dependent upon:
A)How much the taxpayer has contributed to the Social Security program.
B)The individual's age.
C)The number of quarters the individual worked.
D)The individual's adjusted gross income from other sources.
E)None of the above.
Q2) The tax concept and economic concept of income are in agreement on which of the following:
A)The fair rental value of an owner-occupied home should be included in income.
B)The increase in value of assets held for the entire year should be included in income for the year.
C)Rent income for 2013 collected in 2012 is income for 2012.
D)All of the above.
E)None of the above.
Q3) Dick and Jane are divorced in 2011.At the time of the divorce, Dick had a lawsuit pending.He had filed suit against a former employer for overtime pay.As part of a divorce agreement, Dick agreed to pay Jane one-half of the proceeds from the lawsuit.In 2012, Dick collected $250,000 from the former employer and paid Jane $125,000.What are the tax consequences for Dick receiving the $250,000 and then paying Jane the $125,000?
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Chapter 5: Gross Income: Exclusions
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Q1) Mother participated in a qualified state tuition program for the benefit of her son.She contributed $15,000.When the son entered college, the balance in the fund satisfied the tuition charge of $20,000.When the funds were withdrawn to pay the college tuition for her son, Mother must include $5,000 ($20,000 - $15,000) in her gross income.
A)True
B)False
Q2) Generally, a U.S.citizen is required to include in gross income the salary and wages earned while working in a foreign country even if the foreign country taxes the income.
A)True
B)False
Q3) Agnes receives a $5,000 scholarship which covers her tuition at Parochial High School.She may exclude the $5,000 scholarship she received although the scholarship is to attend a private high school.
A)True
B)False
Q4) What are the tax problems associated with payments received by a wife from her deceased husband's employer? (Assume the wife renders no services to the employer.)
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Chapter 6: Deductions and Losses: in General
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Q1) Investigation of a business unrelated to one's present business never results in a current period deduction of the entire amount if the amount of the investigation expenses exceeds $5,000.
A)True
B)False
Q2) For a vacation home to be classified in the personal/rental use category, what attributes must be present?
Q3) Taylor, a cash basis architect, rents the building in which his office is located for $5,000 per month.He commenced his practice on February 1, 2012.In order to guarantee no rent increases during an 18-month period, he signed an 18-month lease and prepaid the $90,000 on February 1, 2012.How much can Taylor deduct as rent expense for 2012?
Q4) The ordinary and necessary expenses for operating an illegal gambling operation (excluding such items as fines, bribes, and other illegal payments) are deductible.
A)True
B)False
Q5) In applying the $1 million limit on deducting executive compensation, what corporations are subject to the deduction limit? What executives are covered?
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Page 8
Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) Regarding research and experimental expenditures, which of the following are not qualified expenditures?
A)Costs of improving an existing pilot model.
B)Costs to develop a plant process.
C)Costs of developing a formula.
D)Depreciation on a building used for research.
E)All of the above are qualified expenditures.
Q2) The amount of a farming loss cannot exceed the amount of the taxpayer's NOL for the taxable year.
A)True
B)False
Q3) The domestic production activities deduction (DPAD) for 2012 cannot exceed 50% of all W-2 wages paid to employees by the taxpayer during the tax year.
A)True
B)False
Q4) Identify the factors that should be considered in determining whether a transaction is a business bad debt or a nonbusiness bad debt.
Q5) How is qualified production activities income (QPAI) calculated?
Page 9
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Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Sample Questions
Q1) Tom acquired a used five-year class asset on November 5, 2012 for $20,000. This was the only asset Tom acquired in 2012. He placed the asset in service on January 20, 2013. However, because the asset was purchased in 2012, Tom deducted regular MACRS cost recovery on the asset for the year 2012.He did not elect to expense any of the asset under § 179. In 2013, Tom purchased no assets and because he had no taxable income, he did not deduct any cost recovery. In 2014, Tom sold the five-year asset on September 25th. Determine the basis of the five-year asset at the time of the sale.
Q2) Carlos purchased an apartment building on November 16, 2012, for $3,000,000.Determine the cost recovery for 2012.
A)$9,630.
B)$11,910.
C)$13,950.
D)$22,740.
E)None of the above.
Q3) The statutory dollar cost recovery limits under § 280F do not apply to all automobiles.
A)True
B)False
Q4) Discuss the reason for the inclusion amount with respect to leased automobiles.
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Chapter 9: Deductions: Employee and Self-Employed
Related Expenses
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Sample Questions
Q1) Amy lives and works in St.Louis.In the morning she flies to Boston, has a three-hour business meeting, and returns to St.Louis that evening.For tax purposes, Amy was away from home.
A)True
B)False
Q2) In May 2012, after 11 months on a new job, Ken is fired after he assaults a customer. Ken must include in his gross income for 2012 any deduction for moving expenses he may have claimed on his 2011 tax return.
A)True
B)False
Q3) An individual, age 40, who is not subject to the phase-out provision may contribute a deductible amount to a Roth IRA up to $5,000 per year in 2012.
A)True
B)False
Q4) Under the automatic mileage method, one rate does not cover every type of expense.For 2012, what are the rates for business use, education, moving, charitable, and medical?
Q5) Once set for a year, when might the IRS change the rate for the automatic mileage method?
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) Which of the following items would be an itemized deduction on Schedule A of Form 1040 subject to the 2%-of-AGI floor?
A)Professional dues to membership organizations.
B)Work uniforms that cannot be used for normal wear.
C)Job-hunting costs.
D)Hobby losses up to the amount of hobby income.
E)All of the above.
Q2) Taxes assessed for local benefits, such as a new sidewalk, are not deductible as real property taxes.
A)True
B)False
Q3) Ronaldo contributed stock worth $12,000 to the Children's Protective Agency, a qualified charity.He acquired the stock twenty months ago for $6,000.He may deduct $6,000 as a charitable contribution deduction (subject to percentage limitations).
A)True
B)False
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Chapter 11: Investor Losses
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Q1) In the current year, Kelly had a $35,000 loss from a real estate rental activity in which she is a 10% owner.If she is an active participant and if her modified AGI is $100,000, she can deduct $25,000 of the loss.
A)True
B)False
Q2) Orange Corporation, a closely held (non-personal service) C corporation, earns active income of $300,000 in the current year.The corporation also receives $35,000 in dividends and incurs a loss of $50,000 from an investment in a passive activity.What is Orange's income for the year after considering the passive investment?
Q3) Ahmad owns four activities. He participated for 120 hours in Activity A, 150 hours in Activity B, 140 hours in Activity C, and 100 hours in Activity D. Which of the following statements is correct?
A) Activities A, B, C, and D are all significant participation activities.
B) Activities A, B, and C are significant participation activities.
C) Ahmad is a material participant with respect to Activities A, B, and C.
D) Ahmad is a material participant with respect to Activities A, B, C, and D.
E) None of the above.
Q4) What special passive loss treatment is available to real estate activities?
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Page 13
Chapter 12: Tax Credits and Payments
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Sample Questions
Q1) Several years ago, Sarah purchased a structure for $150,000 that was originally placed in service in 1929.In the current year, she incurred qualifying rehabilitation expenditures of $200,000.The amount of the tax credit for rehabilitation expenditures, and the amount by which the building's basis for cost recovery would increase as a result of the rehabilitation expenditures are the following amounts:
A)$20,000 credit, $180,000 basis.
B)$20,000 credit, $200,000 basis.
C)$20,000 credit, $350,000 basis.
D)$40,000 credit, $160,000 basis.
E)None of the above.
Q2) Only self-employed individuals are required to make estimated tax payments. A)True B)False
Q3) The additional Medicare taxes assessed on high-income individuals carry differing tax rates depending on the tax base.
A)True B)False
Q4) Explain the purpose of the disabled access credit and describe the general characteristics of its computation.
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Chapter 13: Property Transactions: Determination of Gain or
Loss, Basis Considerations, and Nontaxable
Exchanges-Part 2
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Sample Questions
Q1) What is the easiest way for a taxpayer who is going to sell property that has declined in value to avoid the § 267 loss disallowance provision?
Q2) Discuss the effect of a liability assumption on the seller's amount realized and the buyer's adjusted basis.
Q3) When a property transaction occurs, what four questions should be considered with respect to the sale or other disposition?
Q4) Discuss the treatment of losses from involuntary conversions.
Q5) What effect does a deductible casualty loss have on the adjusted basis of property?
Q6) Discuss the treatment of realized gains from involuntary conversions.
Q7) Under what circumstances will a distribution by a corporation to its only shareholder result in a capital gain?
Q8) What kinds of property do not qualify under the like-kind provisions?
Q9) Lynn transfers her personal use automobile to her business (a sole proprietorship).The car's adjusted basis is $35,000 and the fair market value is $12,000.No cost recovery had been deducted by Lynn, since she held the car for personal use.Determine the adjusted basis of the car to Lynn's sole proprietorship including the basis for cost recovery.
Page 15
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Chapter 13: A: Property Transactions: Determination of Gain
or Loss, Basis Considerations, and Nontaxable Exchanges-Part 1
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Q1) An exchange of two items of personal property (personalty) that belong to different general business asset classes qualifies for nonrecognition under § 1031 as long as both properties are used in the taxpayer's trade or business.
A)True
B)False
Q2) The maximum amount of the § 121 gain exclusion on sale of a principal residence is $250,000 for a single individual and $500,000 for a married couple.
A)True
B)False
Q3) Under the taxpayer-use test for a § 1033 involuntary conversion, the taxpayer has less flexibility in qualifying replacement property than under the functional-use test.
A)True
B)False
Q4) Section 1033 (nonrecognition of gain from an involuntary conversion) applies to both gains and losses.
A)True
B)False
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Chapter 14: Property Transactions: Capital Gains and
Losses, 1231, Recapture Provisions
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Q1) In the "General Procedure for § 1231 Computation: Step 2.§ 1231 Netting," if the gains exceed the losses, the net gain is offset by the "lookback" nonrecaptured § 1231 losses.
A)True
B)False
Q2) The tax law requires that capital gains and losses be separated from other types of gains and losses because there are limitations on the deduction of net capital losses.
A)True
B)False
Q3) Residential real estate was purchased in 2009 for $345,000, held as rental property, and depreciated straight-line. Assume the land cost was $45,000 and the building cost was $300,000. Depreciation totaled $34,089. The building and land were sold on June 10, 2012, for $683,000 total. What is the tax status of the property, the nature of the gain from the disposition, and is any of it § 1250 depreciation recapture gain or unrecaptured § 1250 gain?
Q4) Depreciation recapture under § 1245 and § 1250 is reported on Form 4797.
A)True
B)False
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Chapter 15: Alternative Minimum Tax
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Q1) Which of the following statements is correct?
A)If the tentative AMT is $10,000 and the regular income tax liability is $12,000, the AMT is $2,000.
B)If the tentative AMT is $12,000 and the regular income tax liability is $10,000, the AMT is $12,000.
C)If the tentative AMT is $10,000 and the regular income tax liability is $12,000, the AMT is a negative $2,000.
D)If the tentative AMT is $12,000, and the regular income tax liability is $10,000, the AMT is $2,000.
E)None of the above.
Q2) Altrice incurs circulation expenditures of $180,000 in 2012.No additional circulation expenditures are incurred in 2013 or 2014.The cumulative adjustment for circulation expenditures for 2012, 2013, and 2014 is $180,000.
A)True
B)False
Q3) Tad and Audria, who are married filing a joint return, have AMTI of $256,000 for 2012. Calculate their AMT exemption.
Q4) Why is there no AMT adjustment for charitable contributions?
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Page 19
Chapter 16: Accounting Periods and Methods
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Q1) Which of the following statements regarding the matching principle is correct?
A)The matching principle is never relevant to tax accounting.
B)The matching principle of financial accounting is an important component of the cash method of accounting.
C)The matching principle of financial accounting is the cornerstone of accrual basis tax accounting.
D)The matching principle of financial accounting is sometimes relevant to timing deductions for an accrual basis taxpayer's recurring items.
E)None of the above.
Q2) In regard to choosing a tax year for a business owned by individuals, which form of business provides the greater number of options in regard to the tax year?
A)A C corporation formed by medical doctors to conduct their practice.
B)A C corporation that is in the retail grocery business.
C)A real estate partnership.
D)An S corporation engaged in manufacturing.
E)All of the above have the same options.
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Chapter 17: Corporations: Introduction and Operating Rules
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Q1) During 2012, Sparrow Corporation, a calendar year C corporation, had operating income of $425,000, operating expenses of $280,000, a short-term capital loss of $10,000, and a long-term capital gain of $25,000.How much is Sparrow's tax liability for 2012?
A)$42,650.
B)$42,800.
C)$45,650.
D)$62,400.
E)None of the above.
Q2) Peach Corporation had $210,000 of active income, $45,000 of portfolio income, and a $230,000 passive loss during the current year.If Peach is a closely held C corporation that is not a PSC, it can deduct $230,000 of the passive loss in the year.
A)True
B)False
Q3) Briefly describe the accounting methods available for adoption by a C corporation.
Q4) What is a limited liability company? What favorable nontax and tax attributes does the LLC entity form offer taxpayers?
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Page 21
Chapter 18: Corporations: Organization and Capital Structure
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Q1) When Pheasant Corporation was formed under § 351, Kristen transferred property (basis of $26,000 and fair market value of $22,500) for § 1244 stock. Kristen's basis in the Pheasant stock is $26,000. Three years later, Pheasant Corporation goes bankrupt and its stock becomes worthless. Kristen, who is single, owned the stock as an investment. Kristen's loss is:
A)$26,000 capital.
B)$22,500 ordinary and $3,500 capital.
C)$3,500 ordinary and $22,500 capital.
D)$26,000 ordinary.
E)None of the above.
Q2) What is the rationale underlying the tax deferral treatment available under § 351?
Q3) Allen transfers marketable securities with an adjusted basis of $120,000, fair market value of $300,000, for 85% of the stock of Heron Corporation.In addition, he receives cash of $40,000.Allen recognizes a capital gain of $40,000 on the transfer.
A)True
B)False
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Page 22
Chapter 19: Corporations: Distributions Not in Complete Liquidation
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Q1) Explain the requirements for waiving the family attribution rules in the case of complete termination redemptions.
Q2) Julian, Berta, and Maria own 400 shares, 400 shares, and 200 shares, respectively, in Caramel Corporation (E & P of $750,000).Berta is Julian's sister, and Maria is Julian's aunt.Caramel Corporation redeems all of Julian's stock for $420,000.Julian paid $200 a share for the stock five years ago.Julian continued to serve on Caramel's board of directors after the redemption.With respect to the redemption:
A)Dividend income of $340,000.
B)Dividend income of $420,000.
C)Long-term capital gain of $340,000.
D)Long-term capital gain of $420,000.
E)None of the above.
Q3) A corporation borrows money to purchase State of Texas bonds.The interest on the loan has no impact on either taxable income or current E & P.
A)True
B)False
Q4) What are the tax consequences of a qualifying stock redemption to the distributing corporation?
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) A subsidiary corporation is liquidated at a time when it is indebted to its parent corporation. The subsidiary corporation distributes property to the parent corporation in satisfaction of the indebtedness. If the liquidation is governed by § 332, neither the subsidiary nor the parent recognize gain or loss on the transfer of property in satisfaction of indebtedness.
A)True
B)False
Q2) In the current year, Dove Corporation (E & P of $1 million) distributes all of its property in a complete liquidation. Alexandra, a shareholder, receives land having a fair market value of $100,000. Dove Corporation had purchased the land as an investment three years ago for $75,000, and the land was distributed subject to a $70,000 liability. Alexandra took the land subject to the $70,000 liability. What is Alexandra's basis in the land?
A)$100,000.
B)$75,000.
C)$30,000.
D)$5,000.
E)None of the above.
Q3) Discuss the role of letter rulings in corporate reorganizations.
Page 24
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Chapter 21: Partnerships
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Q1) Dan receives a proportionate nonliquidating distribution when the basis of his partnership interest is $30,000.The distribution consists of $10,000 in cash and property with an adjusted basis to the partnership of $24,000 and a fair market value of $26,500.Dan's basis in the noncash property is:
A)$26,500.
B)$24,000.
C)$20,000.
D)$10,000.
E)None of the above.
Q2) PaulCo, DavidCo, and Sean form a partnership with cash contributions of $80,000, $50,000 and $30,000, respectively, and agree to share profits and losses in the ratio of their original cash contributions.PaulCo uses a January 31 fiscal year-end, while DavidCo and Sean use a November 30 and December 31 year-end, respectively.The partnership must use the least aggregate deferral method to determine its year end.
A)True
B)False
Q3) The "outside basis" is defined as a partner's basis in the partnership interest.
A)True
B)False
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Page 25
Chapter 22: S: Corporations
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Q1) An S election is made on the shareholder's Form 1040.
A)True
B)False
Q2) Which, if any, of the following items has no effect on the stock basis of an S corporation shareholder?
A)Short-term capital loss.
B)Long-term capital gain.
C)Cost of goods sold.
D)Net sales.
E)A mortgage taken by the S corporation.
Q3) List some of the separately stated items listed on Schedule K of the Form 1120S.
Q4) The corporate ____________________ ____________________ tax is avoided in an S corporation.
Q5) The § 1202 exclusion of _________________ on the disposition of small business stock (is/is not) _________________ available for S stock.
Q6) The alternative minimum tax applies to an S corporation.
A)True
B)False
Q7) Outline the requirements that an entity must meet to elect S corporation status.
Page 26
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Chapter 23: Exempt Entities
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Q1) Which of the following is a requirement for exempt status?
A)The organization does not exert political influence.
B)The organization has not been subject to intermediate sanctions for the past 3 taxable years.
C)The organization serves some type of common good.
D)Only a.and c.
E)a., b., and c.
Q2) What tax forms are used to apply for exempt status?
Q3) Engaging in a prohibited transaction can result in an exempt organization being subject to Federal income tax, but cannot cause it to lose its exempt status unless the exempt organization repeats the prohibited transaction.
A)True
B)False
Q4) The income from a bingo game or a casino game conducted by an exempt organization may be unrelated business income.
A)True
B)False
Q5) Define average acquisition indebtedness with respect to debt-financed property.
Q6) What are the common characteristics of organizations that receive exempt status?
Page 27
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Chapter 24: Multistate Corporate Taxation
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Q1) Typically exempt from the sales/use tax base is the purchase of prescription medicines by an individual.
A)True
B)False
Q2) Bulky Company sold an asset on the first day of the tax year for $500,000.Bulky's Federal tax basis for the asset was $300,000.Because of differences in cost recovery schedules, the state regular-tax basis in the asset was $375,000.What adjustment, if any, should be made to Bulky's Federal taxable income in determining the correct taxable income for the typical state?
A)$75,000.
B)$25,000.
C)($75,000).
D)$0.
Q3) Almost all of the states assess some form of consumer-level sales/use tax.
A)True
B)False
Q4) A few states assess a state-level tax on an S corporation that operates in the state.
A)True
B)False
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Chapter 25: Taxation of International Transactions
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148 Verified Questions
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Sample Questions
Q1) An advance pricing agreement (APA) is used between:
A)Two or more governments.
B)Two related taxpayers.
C)The taxpayer and the IRS.
D)The IRS and U.S.taxing authorities.
Q2) Julio, a nonresident alien, realizes a gain on the sale of commercial real estate located in Omaha.The real estate was sold to Mariana, Julio's cousin who is also a nonresident alien.Julio recognizes foreign-source income from the sale because his home country is not the U.S.
A)True
B)False
Q3) Waltz, Inc., a U.S.taxpayer, pays foreign taxes of $50,000 on foreign-source general basket income of $90,000. Waltz's worldwide taxable income is $450,000, on which it owes U.S.taxes of $157,500 before FTC. Waltz's FTC is $50,000.
A)True
B)False
Q4) Describe and diagram the timeline that most businesses use to enter the international markets.
Q5) Discuss the primary purposes of income tax treaties.
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Chapter 26: Tax Practice and Ethics
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147 Verified Questions
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Q1) A ____________________% penalty may result when a taxpayer overstates by 150% or more the value of an asset contributed to a charity. or
Q2) The taxpayer can avoid a valuation penalty for overstating the value of the charitable contribution of an artwork by showing that the deduction claimed was based on a qualified ____________________.
Q3) The IRS is one of the largest Federal agencies, employing about ____________________ people throughout the year.
Q4) When a tax issue is taken to court, the burden of proof is on the taxpayer to show that the items reported on the return are correct. A)True B)False
Q5) The taxpayer or a tax advisor may be subject to penalties if there is a misstatement of the valuation of an item reported on the tax return. Describe how these penalties work.
Q6) Carole, a CPA, feels that she cannot act as an aggressive advocate for tax clients in today's environment.What aspects of the ethical conduct of a tax practice might have influenced Carole's attitude?
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Chapter 28: Income Taxation of Trusts and Estates
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Sample Questions
Q1) The Prakash Trust is required to pay its entire annual accounting income to the Daytona Museum, a qualifying charity.The trust's personal exemption is:
A)$0.
B)$100.
C)$300.
D)$600.
Q2) Like a corporation, the fiduciary reports and pays its own Federal income tax liability. A)True
B)False
Q3) This year, the Huang Trust distributed all of its accounting income and $1,000 from corpus.Huang's taxable income for the year is:
A)$0.
B)($100).
C)($300).
D)($1,000).
Q4) The exempt interest income of a trust usually is allocable to ____________________ beneficiaries.
Q5) Every ____________________ trust is allowed a $300 personal exemption.
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