Taxation and Business Strategy
Chapter Exam Questions
Course Introduction
Taxation and Business Strategy explores the intricate relationship between tax regulations and business decision-making. This course delves into how tax considerations influence corporate strategies related to investments, financing, mergers and acquisitions, and organizational structure. Students will gain a deep understanding of tax planning, compliance, and the ways firms can optimize tax positions while adhering to legal and ethical standards. The course also addresses international tax issues, transfer pricing, and the impact of evolving tax policy on global business operations, equipping students with the analytical tools needed to integrate tax considerations into broader business strategies.
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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Q1) The U.S. government has jurisdiction to tax individuals who are not U.S. citizens but who are permanent U.S. residents.
A)True
B)False
Answer: True
Q2) Which of the following sources of tax law carries the most authority?
A) Revenue procedure
B) Treasury regulation
C) Supreme Court decision
D) The three sources of tax law have equal authority
Answer: C
Q3) A sales tax is an example of a transaction-based tax.
A)True
B)False
Answer: True
Q4) A tax is a payment to support the cost of government.
A)True
B)False
Answer: True
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Chapter 2: Policy Standards for a Good Tax
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Q1) Which of the following taxes is most convenient for individuals to pay?
A) Sales tax
B) Use tax
C) Federal income tax
D) Real property tax
Answer: A
Q2) Individuals who believe that a tax system is fair are less likely to cheat on their taxes than individuals who believe that the system is unfair.
A)True
B)False Answer: True
Q3) A tax meets the standard of sufficiency if it is easy for people to pay the tax.
A)True
B)False
Answer: False
Q4) State use taxes are more convenient for individual consumers than state sales taxes.
A)True
B)False
Answer: False
Page 4
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Chapter 3: Taxes As Transaction Costs
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Q1) Mr. Quest plans to engage in a transaction that will generate $10,000 cash flow in year 0, year 1, and year 2 ($30,000 total cash flow). Which of the following statements is true?
A) If the cash flow is not taxable income, the before-tax and after-tax cash flows from the transaction are equal.
B) If the cash flow is not taxable income, the NPV of the transaction is $30,000.
C) Mr. Quest's discount rate for computing the NPV of the transaction depends on his marginal tax rate.
D) None of the above is true.
Answer: A
Q2) The present value of a dollar available in a future period increases as the discount rate increases.
A)True
B)False
Answer: False
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Chapter 4: Maxims of Income Tax Planning
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Q1) In 20Y1, Ms. Graves transferred appreciated property to KL Partnership in exchange for an ownership interest in the partnership. She deliberated waited until 20Y3 before taking cash out of the partnership. Ms. Graves may have been trying to prevent the IRS from applying the:
A) Business purpose doctrine
B) Economic substance doctrine
C) Substance over form doctrine
D) Step transaction doctrine
Q2) Mr. Blau structured an income-generating transaction so that the $90,000 income and cash flow shifted to Mr. Blau's sister, Kim. If Mr. Blau's marginal tax rate is 35%, and Kim's tax rate is 15%, compute the tax savings from the income shift.
A) $13,500
B) $21,500
C) $31,500
D) None of the above
Q3) Tax evasion is a federal crime punishable by imprisonment.
A)True
B)False
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Chapter 5: Tax Research
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Q1) Novice tax researchers tend to exam less material in the course of a tax research project than experienced tax researchers.
A)True
B)False
Q2) When performing step three of the tax research process:
A) A commercial tax service may provide an excellent starting point.
B) The researcher must discover all the facts concerning the client's transaction.
C) The researcher must communicate his or her conclusions to the client.
D) The researcher should always consult primary authorities first before turning to secondary authorities for guidance.
Q3) Which of the following is primary authority on which to base research conclusions?
A) This textbook
B) An editorial explanation in a commercial tax service
C) A Treasury regulation
D) A treatise written by a tax attorney and published in a legal journal
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Chapter 6: Taxable Income From Business Operations
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Q1) Which of the following statements about the accrual method of accounting is false?
A) The accrual method is the required method of accounting under GAAP.
B) Every publicly held corporation must use the accrual method of accounting to prepare financial statements.
C) The accrual method of accounting under GAAP and the accrual method of accounting for computing taxable income are identical.
D) Corporations with more than $5 million average annual gross receipts are required to use the accrual method to compute taxable income.
Q2) Taxpayers that sell merchandise to their customers must use the accrual method as their overall method of accounting.
A)True
B)False
Q3) A cash basis taxpayer must account for any prepayment of interest expense under the accrual method.
A)True
B)False
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Q1) BriarHill Inc. purchased four items of tangible personalty in 2015 at a total cost of $279,000. BriarHill cannot elect to expense any of the cost of the property under Section 179.
A)True
B)False
Q2) Terrance Inc., a calendar year taxpayer, purchased equipment for $2,765,000 and placed it in service on March 4, 2015. The equipment was seven-year recovery property and was the only depreciable asset that Terrance purchased during 2015.
a. Compute Terrance's tax depreciation with respect to the equipment for 2015 and 2016.
b. Compute Terrance's adjusted basis in the equipment in December 31, 2016.
c. How would your answer to a. change if Terrance placed the equipment in service in 2014 instead of 2015?
Q3) Which of the following intangible assets is not amortizable for tax purposes?
A) Organizational costs
B) Patent with a 12-year remaining life
C) Partnership interest
D) All of these assets are amortizable for tax purposes
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Chapter 8: Property Dispositions
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Q1) Abada Inc. has a $925,000 basis in 100% of the stock of AbWest Inc., which derives all its income from a manufacturing activity. If Abada determines that the AbWest stock is worthless, it can recognize a $925,000 ordinary loss.
A)True
B)False
Q2) Which of the following is a capital asset?
A) Supplies used in a business
B) Business inventory
C) Land used in a business
D) None of the above
Q3) Mrs. Stile owns investment land subject to a $600,000 nonrecourse mortgage. Her basis in the land is $212,000, and the land's appraised FMV is $575,000. Mrs. Stile is considering defaulting on the mortgage and allowing the creditor to foreclose. If Mrs. Stile disposes of the land through a foreclosure, she will recognize:
A) $212,000 capital loss
B) $212,000 ordinary abandonment loss
C) $363,000 capital gain
D) $388,000 capital gain
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Chapter 9: Nontaxable Exchanges
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Q1) IPM Inc. and Zeta Company formed IPeta Inc. by transferring business assets in exchange for 1,000 shares of IPeta common stock. IPM transferred assets with a $675,000 FMV and a $283,000 adjusted tax basis and received 600 shares. Zeta transferred assets with a $450,000 FMV and a $98,000 adjusted tax basis and received 400 shares. Determine IPM and Zeta's tax basis in their IPeta stock and IPeta's aggregate tax basis in the transferred assets.
A) IPM's basis $283,000; Zeta's basis $450,000; IPeta's basis $733,000
B) IPM's basis $283,000; Zeta's basis $98,000; IPeta's basis $381,000
C) IPM's basis $675,000; Zeta's basis $450,000; IPeta's basis $1,125,000
D) None of the above.
Q2) YCM Inc. exchanged business equipment (initial cost $114,800; accumulated depreciation $63,400) for like-kind equipment worth $110,000 and $10,000 cash. As a
result, Rydell must recognize:
A) No gain or loss
B) $10,000 Section 1231 gain
C) $10,000 ordinary gain
D) None of the above.
Q3) The wash sale rule can result in the nonrecognition of both gains and losses.
A)True
B)False
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Chapter 10: Sole Proprietorships, Partnerships, Llcs, and S Corporations
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Q1) Cramer Corporation and Mr. Chips formed a partnership in which Cramer is the general partner and Mr. Chips is a limited partner. 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 Cramer's tax basis in its partnership interest?
A) $500,000
B) $1,200,000
C) $850,000
D) $650,000
Q2) A partnership deducts guaranteed payments paid to its partners in computing ordinary income, and partners report guaranteed payments received as ordinary income.
A)True B)False
Q3) Businesses must withhold payroll taxes from payments made to independent contractors and periodically remit such taxes to the state and federal governments.
A)True B)False
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Chapter 11: The Corporate Taxpayer
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Q1) If a corporation's depreciation expense for regular tax purposes is $32,000 and its depreciation expense for alternative minimum tax purposes is $28,000, such corporation will have a negative (decrease) depreciation adjustment for alternative minimum taxable income.
A)True B)False
Q2) Angel Corporation's current-year regular tax liability is $40,000. Angel is eligible for a general business credit of $45,000. The corporation will receive a $5,000 refund of federal income tax.
A)True B)False
Q3) A corporation that owns more than $10 million of total assets uses which schedule to reconcile book income to taxable income?
A) Schedule M-1
B) Schedule M-2
C) Schedule M-3
D) Schedule M-4
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Chapter 12: The Choice of Business Entity
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Q1) A business generates profit of $100,000. The owner has a 39.6% marginal tax rate. What amount of corporate and individual income tax will be paid on this profit if the business is a regular corporation and no income is distributed?
A) Corporate tax, $22,250; individual tax, $39,600
B) Corporate tax, $22,250; individual tax, $0
C) Corporate tax, $0; individual tax, $39,600
D) Corporate tax, $22,250; individual tax, $15,550
Q2) For the current tax year, Cuddle Corporation's $500,000 of taxable income is all considered to be personal holding company income. The corporation did not pay dividends. Which of the following statements is true?
A) The corporation will owe a personal holding company tax of $170,000. B) The corporation will owe a regular tax of $100,000.
C) The corporation's total tax liability will be $340,000.
D) The corporation's total tax liability will be $270,000.
Q3) Family partnerships attempt to divide the income of a business among family members in order to decrease the overall tax burden of the family unit.
A)True B)False
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Chapter 13: Jurisdictional Issues in Business Taxation
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Q1) Which of the following taxes is eligible for the foreign tax credit?
A) Property taxes paid to a foreign country on the value of property owned in that country.
B) Value-added taxes assessed on the value of inventory manufactured in a foreign country.
C) Income tax assessed by a local government within a foreign country.
D) Sales tax assessed on the purchase of consumer goods in a foreign country.
Q2) Article 1 of the U.S. Constitution, referred to as the commerce clause, prohibits a state from charging an extra 10 cent tax per gallon on gasoline sold to trucks with out-of-state license plates.
A)True
B)False
Q3) Which of the following activities create state income tax nexus?
A) Selling products over the Internet to customers in the state. The products are delivered by U.S. mail.
B) Traveling salespersons soliciting orders for tangible goods from customers in the state.
C) Ownership of manufacturing and distribution facilities within the state.
D) All of the above activities create state income tax nexus
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Chapter 14: The Individual Tax Formula
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Q1) Charlie is single and provides 100% of the financial support for his dependent mother, Angela, who lives with Charlie. Charlie's filing status is head of household.
A)True
B)False
Q2) Adjusted gross income equals total income less itemized deductions.
A)True
B)False
Q3) Mr. and Mrs. Kay, ages 68 and 66, file a joint return. Mrs. Kay is legally blind. Compute their standard deduction.
A) $12,600
B) $16,350
C) $15,100
D) $17,250
Q4) The unextended due date for the individual tax return (Form 1040) is the 15<sup>th</sup> day of the third month following the close of the taxable year.
A)True
B)False
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Chapter 15: Compensation and Retirement Planning
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Q1) Wallace Corporation needs an additional worker on a multiyear project. It could hire an employee for a $30,000 annual salary. Alternatively, it could engage an independent contractor for a $35,000 annual fee. Which of the following is true?
A) Wallace must withhold payroll tax from the salary or the fee.
B) Wallace must withhold federal and state income tax from the salary or the fee.
C) Wallace must issue a Form W-2 to the employee or the independent contractor.
D) None of the above is true.
Q2) Which of the following is not a benefit of nonqualified deferred compensation plans?
A) Nonqualified plans may discriminate in favor of highly compensated executives.
B) There is no limit on the amount of nonqualified deferred compensation that can be provided to an employee.
C) Nonqualified deferred compensation plans are less risky for participating employees than qualified retirement plans.
D) Employers do not have to expend cash to fund a nonqualified plan.
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Chapter 16: Investment and Personal Financial Planning
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Q1) Which of the following does not reduce a decedent's taxable estate?
A) The decedent's funeral expenses.
B) Testamentary transfers to charitable organizations.
C) Testamentary transfers to the decedent's spouse.
D) Testamentary transfers to the decedent's children.
Q2) An owner of undeveloped land held for investment must capitalize the property taxes paid on the land each year.
A)True
B)False
Q3) Ten years ago, Elaine paid $10 per share for 2,000 shares of Lazlo common stock. This year, Elaine learned that Lazlo is in bankruptcy and can pay only 40% of its outstanding debt. What are the tax consequences to Elaine of Lazlo's bankruptcy?
A) $20,000 long-term capital loss
B) $12,000 long-term capital loss
C) $20,000 ordinary loss
D) No gain or loss
Q4) All gratuitous transfers of property are subject to gift tax.
A)True
B)False
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Chapter 17: Tax Consequences of Personal Activities
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Q1) Interest paid on debt incurred to acquire, build, or improve a personal residence is a preference item for computing the alternative minimum tax.
A)True
B)False
Q2) Personal exemptions are allowed in computing alternative minimum taxable income (AMTI).
A)True B)False
Q3) An activity will be classified as a hobby if the taxpayer fails to make a profit from the activity.
A)True
B)False
Q4) Mrs. Kronin received $16,200 child support payments from her former husband. These payments are excluded from Mrs. Kronin's gross income.
A)True B)False
Q5) Gains realized on the sale of personal use assets are taxable. A)True B)False
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Chapter 18: The Tax Compliance Process
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Q1) An individual taxpayer is not required to give the IRS an explanation for extending the filing date for Form 1040.
A)True
B)False
Q2) Which type of audit can be handled entirely by telephone or through the mail?
A) Correspondence examination
B) Office examination
C) Field examination
D) All of the above
Q3) F&D Inc. ceased operations and dissolved under state law in 2014. Mrs. Herron, a 20% shareholder, received a $490,300 liquidating distribution from F&D. This year, the IRS determined that F&D underpaid its 2013 and 2014 income tax by $967,100. How much of this deficiency can the IRS assess against Mrs. Herron?
A) -0-
B) $193,420
C) $490,300
D) $967,100
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