Taxation and Business Strategy
Exam Answer Key
Course Introduction
This course explores the intersection of taxation and business strategy, equipping students with a comprehensive understanding of how tax considerations influence corporate decision-making and competitive positioning. Topics include the economic analysis of taxation, the impact of different tax systems on business operations, tax planning opportunities, and the strategic use of tax laws in both domestic and international contexts. Students will analyze real-world cases to understand how taxes affect choices relating to investment, financing, organizational structure, and cross-border activities. By the end of the course, students will be able to identify tax-efficient strategies and understand the ethical and regulatory implications of tax planning in business.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 2014 17th Edition by
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Page 2
Sally Jones
Chapter 1: Taxes and Taxing Jurisdictions
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Sample Questions
Q1) Which of the following statements about Treasury regulations is false?
A)Treasury regulations are written to interpret and explain the Internal Revenue Code.
B)Treasury regulations are part of the statutory law.
C)A federal court can invalidate a Treasury regulation if the court concludes that the regulation incorrectly interprets the Internal Revenue Code.
D)None of the above is false.
Answer: B
Q2) How often does Congress amend the Internal Revenue Code?
A)Rarely (the Internal Revenue Code has not been amended since 1986)
B)Occasionally (perhaps once every decade)
C)Regularly (at least once every five years)
D)Constantly (at least once a year)
Answer: D
Q3) The potential for conflict among taxing jurisdictions is greatest for businesses operating on a global scale.
A)True
B)False
Answer: True
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3
Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) Vertical equity focuses on measurement of the tax base, and horizontal equity focuses on the tax rate structure.
A)True
B)False
Answer: False
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 convenient tax has low compliance costs for taxpayers and low collection and enforcement costs for the government.
A)True
B)False
Answer: True
Q4) Tax liability divided by taxable income equals marginal tax rate.
A)True
B)False
Answer: False
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Chapter 3: Taxes As Transaction Costs
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Sample Questions
Q1) Net cash flow from a transaction equals the difference between cash received and cash disbursed in the transaction.
A)True
B)False
Answer: True
Q2) Private market transactions create an opportunity for bilateral tax planning.
A)True
B)False Answer: True
Q3) Mr. Jessel sold 4,200 shares of stock in a publicly held corporation through his stock broker. This transaction occurred in a private market.
A)True
B)False Answer: False
Q4) The tax cost of an income-generating transaction increases as the taxpayer's marginal tax rate increases.
A)True
B)False Answer: True
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Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) Hilex Inc. structures a transaction to shift income from its 20Y0 tax year to its 20Y2 tax year. This tax planning strategy may be taking advantage of the:
A)Character variable
B)Entity variable
C)Time period variable
D)Jurisdiction variable
Q2) Andrea Mitchell can shift income to her daughter, Lynn, by endorsing a check for $10,000 received for a client over to Lynn.
A)True
B)False
Q3) Which of the following statements about tax strategies is false?
A)Tax planners should prefer a simple strategy over a complex strategy.
B)Tax planners should prefer a flexible strategy over an inflexible strategy.
C)Tax planners should consider the tax consequences of a strategy to all parties.
D)None of the above is false.
Q4) Corporations, LLCs, and partnerships are all taxable entities.
A)True
B)False
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Chapter 5: Tax Research
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Sample Questions
Q1) A citator may be used to determine the status of tax judicial decisions, revenue rulings, and revenue procedures.
A)True
B)False
Q2) Professional tax research conclusions should always be based on relevant secondary authority.
A)True B)False
Q3) When analyzing tax authorities, the researcher must decide if the authority requires a factual judgment or an evaluative judgment. The difference between the two can be described as follows:
A)In making an evaluative judgment, the researcher can provide a definitive answer to the research question.
B)In making a factual judgment, the authority may be subject to interpretation.
C)In making an evaluative judgment, the researcher must draw a subjective conclusion that results in a qualified answer.
D)There is little difference between a factual judgment and an evaluative judgment.
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Page 7
Chapter 6: Taxable Income From Business Operations
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Sample Questions
Q1) Porter Inc. incurred a $20,000 expense only $13,400 of which was deductible. Which of the following is true?
A)This transaction resulted in a $6,600 unfavorable difference between book income and taxable income.
B)This transaction resulted in a $6,600 favorable difference between book income and taxable income.
C)If this transaction resulted in a temporary book/tax difference, it had no effect on Porter's deferred tax accounts.
D)If this transaction resulted in a permanent book/tax difference, it had no effect on the computation of Porter's tax expense per books.
Q2) Which of the following business expenses always results in a difference between taxable income and book income?
A)Rent expense
B)Interest expense
C)Client entertainment
D)Salary expense
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) A corporation that incurs $28,500 organization costs must capitalize the costs and amortize them over 180 months.
A)True
B)False
Q2) Pettit Company purchased heavy equipment by giving the seller a $30,000 cash down payment and a 5-year interest-bearing note for the $170,000 balance of the price. Compute Pettit's book basis and tax basis in the equipment.
A)Book basis $30,000; tax basis $170,000
B)Book and tax basis $200,000
C)Book basis $200,000; tax basis $30,000
D)Book and tax basis $30,000
Q3) Selkie Inc. paid a $2 million lump sum to purchase a business. According to the contract, the seller of the business is prohibited from engaging in a similar business for 18 months. Selkie allocated $300,000 of the purchase price to this covenant not to compete. Selkie may amortize the $300,000 over 15 years.
A)True
B)False
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Page 9
Chapter 8: Property Dispositions
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Sample Questions
Q1) Mr. and Mrs. Marley operate a small business. This year, the Marleys sold a commercial office building used in their business for $1.1 million. They purchased the building in 1999 for a cost of $900,000 and have deducted $300,000 MACRS depreciation through date of sale. The Marleys should characterize the $500,000 gain recognized on sale as:
A)Capital gain
B)Section 1231 gain
C)$300,000 ordinary gain and $200,000 Section 1231 gain
D)None of the above
Q2) Lenoci Inc. paid $310,000 for equipment three years ago. This year, it sold the equipment for $200,000. Through date of sale, accumulated book depreciation was $93,840 and accumulated tax depreciation was $147,327. Which of the following statements is true?
A)The sale results in a $53,487 favorable temporary book/tax difference.
B)The sale results in a $53,487 unfavorable temporary book/tax difference.
C)The sale results in a $53,487 unfavorable permanent book/tax difference.
D)None of the above is true.
Q3) Because land is nondepreciable, it is always a capital asset.
A)True
B)False
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Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) Eliot Inc. transferred an old asset with a $53,100 adjusted tax basis plus $5,000 cash in exchange for a new asset worth $75,000. Which of the following statements is false?
A)The old asset's FMV is $70,000.
B)If the exchange is nontaxable, Eliot's recognized gain is $5,000.
C)If the exchange is nontaxable, Eliot's tax basis in the new asset is $58,100.
D)None of the statements is false.
Q2) Mr. and Mrs. Eyre own residential rental property that they would like to dispose of in a nontaxable exchange. Which of the following would not qualify as like-kind property?
A)Commercial office building
B)Undeveloped land
C)Warehouse used to store transportation equipment
D)All of the above qualify as like-kind property.
Q3) V&P Company exchanged unencumbered investment land for farmland subject to a $200,000 mortgage. If V&P realized a $168,000 gain on the exchange, it must recognize the entire gain.
A)True
B)False
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Page 11
Chapter 10: Sole Proprietorships, Partnerships, Llcs, and S
Corporations
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Sample Questions
Q1) Businesses are required by law to withhold federal income tax from the compensation paid to their employees.
A)True
B)False
Q2) Which of the following statements regarding sole proprietorships is false?
A)A sole proprietorship has no legal identity separate from that of its owner.
B)Sole proprietorships are the most common form of business entity in the U.S.
C)The cash flow generated by a sole proprietorship belongs to the owner.
D)The assets and liabilities of a sole proprietorship are held in the name of the business, not the owner.
Q3) A partner's tax basis in his or her partnership interest is decreased by partnership distributions.
A)True
B)False
Q4) A partner's distributive share of partnership profits will increase his or her tax basis in the partnership interest.
A)True
B)False
Page 12
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Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) Torquay Inc.'s 2012 taxable income was $9,782,200, and its tax liability was $3,325,948. Torquay's director of tax estimates that the corporation's 2013 taxable income will be $13,350,000. Use the corporate tax rate schedule to compute Torquay's 2013 estimated tax payment due on April 15, 2013.
A)$1,134,750
B)$1,028,813
C)$831,487
D)$1,143,125
Q2) Which of the following is a means to avoid the double taxation burden imposed on the profits of corporations?
A)Treat all corporations as pass through entities for federal tax purposes.
B)Enact tax legislation that would make dividends nontaxable to all of the corporation's shareholders.
C)Allow corporate shareholders a credit on their tax returns for the taxes paid by the corporation on the profits currently distributed to such shareholders as dividends.
D)All of the above would avoid double taxation.
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13
Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) Cathy is the President and sole shareholder of Boxer, Inc., a regular corporation. The corporation reported taxable income of $435,000 after deducting Cathy's $800,000 salary. If the IRS disallowed $550,000 of the salary as unreasonable compensation, the corporation's regular income tax will change by a:
A)$187,000 increase
B)$175,000 increase
C)$175,000 decrease
D)$187,000 decrease
Q2) Bryan Houlberg expects his C corporation to generate a profit of $200,000. What is Bryan's after-tax cash flow from the corporation if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 39.6%?
A)$120,800
B)$90,188
C)$111,000
D)$151,438
Q3) Typical family-owned businesses are operated as pass-through entities.
A)True
B)False
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Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) Stockholm Imports Inc., a U.S. multinational, received a $500,000 dividend from its foreign subsidiary. The subsidiary paid $112,000 foreign income tax with respect to this dividend. Stockholm's U.S. tax rate is 34%. If Stockholm has no other foreign source income, compute its deemed paid foreign tax credit.
A)$208,080
B)$112,000
C)$58,000
D)$0
Q2) The foreign tax credit is available for income taxes paid to a foreign country.
A)True
B)False
Q3) A corporation is usually subject to tax by any state in which it engages in any business transactions.
A)True
B)False
Q4) Transfer prices cannot be used by U.S. corporations and their foreign affiliates to shift income between taxing jurisdictions.
A)True
B)False
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Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Which of the following statements concerning extensions of time to file an individual tax return is true?
A)The extension of time to file does not extend the time for payment of tax.
B)The extension of time to file is for four months.
C)An individual who requests an extension of time to file must provide the IRS with a reasonable explanation.
D)The IRS may deny an extension request if the taxpayer fails to provide a reasonable explanation.
Q2) The majority of individual taxpayers take the standard deduction rather than itemizing.
A)True
B)False
Q3) In computing taxable income, an individual is allowed to deduct both the standard deduction and any itemized deduction for the year.
A)True
B)False
Q4) Adjusted gross income equals total income less itemized deductions.
A)True
B)False
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Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) Retired participants in employer-sponsored qualified retirement plans must begin receiving distributions no later than the year following the year in which they reach age 70½.
A)True
B)False
Q2) Vernon Inc. needs an additional worker on a multiyear project. Vernon could either hire an employee for a $70,000 annual salary or engage an independent contractor for a $75,000 annual fee. If Vernon's marginal income tax rate is 34%, which option minimizes the after-tax cost of obtaining the worker?
Q3) This year, Mr. Cox elected to contribute $4,000 of his $95,000 salary to his Section 401(k) plan. Mr. Cox's employer made a $4,000 matching contribution. How much compensation is reported on Mr. Cox's Form W-2?
A)$91,000
B)$87,000
C)$95,000
D)$99,000
Q4) Unreimbursed moving expenses are a miscellaneous itemized deduction.
A)True
B)False
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Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) Ms. Adair, a single individual, has $218,000 AGI, which includes $43,000 net investment income. Compute Ms. Adair's unearned income Medicare contribution tax.
A)$0
B)$684
C)$817
D)$1,634
Q2) Six years ago, Mr. Ahmed loaned $10,000 to a neighbor in exchange for an interest-bearing debt obligation. This year, the neighbor informed Mr. Ahmed that he was defaulting on the debt. What are the tax consequences to Mr. Ahmed of this bad debt?
A)$10,000 ordinary loss
B)$10,000 short-term capital loss
C)$10,000 long-term capital loss
D)No loss recognized
Q3) Gain on sale of qualified small business stock is taxed at a maximum rate of 15%.
A)True
B)False
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18
Chapter 17: Tax Consequences of Personal Activities
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Q1) Damage to a personal residence by a tornado is an example of a casualty loss.
A)True
B)False
Q2) Mr. and Mrs. Trent divorced last year. Pursuant to the divorce, Mr. Trent transferred marketable securities (FMV $100,000; basis $67,000) to Mrs. Trent. This year, Mrs. Trent sold the securities for $112,000. Which of the following statements is true?
A)Mrs.Trent recognized a $45,000 gain on sale this year.
B)Mrs.Trent recognized $100,000 income last year.
C)Mrs.Trent recognized a $12,000 gain on sale this year.
D)Mrs.Trent recognized no income last year and no gain on sale this year.
Q3) A taxpayer must have owned and lived in a personal residence at least two of the last five years in order to qualify for the maximum exclusion of gain on sale of that residence.
A)True
B)False
Q4) Real estate taxes deducted for regular tax purposes must be added back in computing alternative minimum taxable income (AMTI).
A)True B)False
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Chapter 18: The Tax Compliance Process a Present Value of
$1 B Present Value of Annuity of $1 C 2013 Income Tax Rates
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Sample Questions
Q1) The IRS who audited Mr. Kodak's 2009 Form 1040 assessed an $87,400 deficiency. If the agent believes that the entire deficiency was caused by Mr. Kodak's willful attempt to cheat the government, compute the resulting civil fraud penalty.
A)$17,480
B)$21,850
C)$65,550
D)None of the above
Q2) Mr. and Mrs. Chung filed their unextended 2012 Form 1040 on May 30, 2013, and had no reasonable cause for the delinquency. The return showed a $10,479 balance of tax due. Compute the Chungs' late-filing and late-payment penalty.
A)$524
B)$1,048
C)$2,620
D)None of the above
Q3) Macy filed her 2012 tax return on its extended due date of October 15, 2013. The IRS has until December 31, 2015, to audit this return.
A)True
B)False
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