Taxation and Business Strategy
Midterm Exam
Course Introduction
This course explores the intersection of taxation and business strategy, highlighting how tax considerations influence corporate decision-making and long-term planning. Students will examine foundational principles of tax law, the effects of various tax regimes on business structures, and methods for aligning tax planning with overall company objectives. Through real-world case studies and practical applications, the course delves into tax implications for mergers and acquisitions, international operations, financing, and compensation strategies, equipping students with the analytical tools necessary to navigate complex tax environments and optimize business outcomes.
Recommended Textbook
McGraw Hills Essentials of Federal Taxation 2019 Edition 10th Edition by Spilker Brian C
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1954 Verified Questions
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Chapter 1: An Introduction to Tax
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Q1) Excise taxes are typically levied on the value of a good purchased.
A)True
B)False
Answer: False
Q2) Estimated tax payments are one way the federal income tax system addresses the "certainty" criterion in evaluating tax systems.
A)True
B)False
Answer: False
Q3) Which of the following is true?
A)A regressive tax rate structure imposes an increasing marginal tax rate as the tax base increases.
B)Regressive tax structures are the most common tax rate structure.
C)An example of a regressive tax is an excise tax.
D)In terms of effective tax rates,a sales tax can be viewed as a regressive tax.
E)None of the choices are correct.
Answer: D
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Chapter 2: Tax Compliance, the Irs, and Tax Authorities
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Q1) The "90-day" letter gives the taxpayer the opportunity to pay a proposed IRS tax adjustment or file a petition in the U.S.District Court to contest the adjustment and hear the case.
A)True
B)False
Answer: False
Q2) Which of the following types of tax services are arranged by code section?
A)legal tax service.
B)annotated tax service.
C)professional tax service.
D)topical tax service.
E)None of the choices are correct.
Answer: B
Q3) Of the two basic types of tax services,beginning tax researchers often prefer topical tax services.
A)True
B)False
Answer: True
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Chapter 3: Tax Planning Strategies and Related Limitations
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Q1) Assume that Bill's marginal tax rate is 30%.If corporate bonds pay 8% interest,what interest rate would a municipal bond have to offer for Bill to be indifferent between the two bonds?
A)30.00%.
B)10.40%.
C)8.00%.
D)7.00%.
E)None of the choices are correct.
Answer: E
Q2) When considering cash outflows,higher present values are preferred.
A)True
B)False
Answer: False
Q3) Tax savings generated from deductions are considered cash inflows. A)True
B)False
Answer: True
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Chapter 4: Individual Income Tax Overview dependents and Filing Status
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Q1) Taxpayers need not include an income item in gross income unless there is a specific tax provision requiring the taxpayer to include the income item in gross income.
A)True
B)False
Q2) Miguel,a widower whose wife died in year 1,maintains a household for himself and his daughter who qualifies as his dependent.Miguel did not remarry.What is the most favorable filing status that Miguel qualifies for in year 3?
A)Single.
B)Qualifying widower.
C)Head household.
D)Married,filing separately.
Q3) Which of the following is not an itemized deduction?
A)Alimony paid.
B)Medical expenses.
C)Real estate taxes.
D)Charitable contributions.
Q4) Qualified dividends are taxed at the same rate as ordinary income.
A)True
B)False
6
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Chapter 5: Gross Income and Exclusions
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Q1) Prizes and awards are generally taxable.
A)True
B)False
Q2) In X8,Erin had the following capital gains (losses)from the sale of her investments:
$2,000 LTCG,$25,000 STCG,($9,000)LTCL,and ($15,000)STCL.What is the amount and nature of Erin's capital gains and losses?
A)$3,000 net short-term capital gain
B)$3,000 net long-term capital loss
C)$4,000 net short-term capital gain
D)$4,000 net long-term capital loss
E)None of the choices are correct
Q3) The all-inclusive definition of income means that gross income is defined very broadly.
A)True
B)False
Q4) Jake sold his car for $2,400 in cash this year.He will realize a taxable gain of $1,000 if he purchased the car for $1,400.
A)True
B)False
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Chapter 6: Individual for Agi Deductions
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Q1) Self-employed taxpayers can deduct the cost of health insurance as a "for" AGI deduction as long as they do not actually participate in their spouses' employer-provided health plan.
A)True
B)False
Q2) On January 1,2018,Jill contributed $18,000 of cash to the XYZ limited partnership for a 25 percent limited partnership interest (without management rights).On April 6,2018,XYZ,limited partnership distributed $2,000 to Jill.For the year ended December 31,2018,Jill received the following income/loss allocations from her partnership investments: (1)XYZ,limited partnership allocated a $5,000 loss to Jill (2)ABC limited partnership allocated $2,300 of income to Jill.Jill is a limited partner in ABC with no management rights.How much of the $5,000 loss from XYZ limited partnership can Jill deduct in 2018?
Q3) If a taxpayer's marginal tax rate is decreasing,a taxpayer contributing to a traditional IRA can earn an after-tax rate of return greater than her before-tax rate of return.
A)True
B)False
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Chapter 7: Individual Income Tax Computation and Tax Credits
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Sample Questions
Q1) The Olympians have three children.The kiddie tax applies to unearned income received by which of the following children?
A)Poseidon is a 20-year-old full-time student who does not support himself.
B)Demeter,a 23-year-old full-time student who supports herself with a job at a grocery store.
C)Zeus is 20 years old and not a student.
D)"Demeter,a 23-year-old full-time student who supports herself with a job at a grocery store" and "Zeus is 20 years old and not a student".
E)None of the choices are correct.
Q2) Generally,income from an active trade or business is subject to the 3.8% net investment income tax.
A)True
B)False
Q3) Harmony is single and was self-employed for the first half of 2018,earning $18,000 of Schedule C (business)net income.During the second half of the year,she began working as an employee and earned $38,000 in salary.What amount of self-employment taxes is Harmony required to pay?
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Page 9
Chapter 8: Business Income, deductions, and Accounting Methods
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Sample Questions
Q1) Ranger Athletic Equipment uses the accrual method and reports on a calendar year.Ranger provides two-year warranties on all sales of equipment.This year Ranger estimated warranty expense for book purposes,and he accrued $1 million of warranty expenses.However,during the year Ranger only spent $400,000 repairing equipment under the warranty.What can Ranger deduct for warranty expense on the tax return for this year?
Q2) John is a self-employed computer consultant who lives and works in Dallas.John paid for the following activities in conjunction with his business.Which is not deductible in any amount?
1)Dinner with a potential client where the client's business was discussed.
2)A trip to Houston to negotiate a contract.
3)A seminar in Houston on new developments in the software industry.
4)A trip to New York to visit a school chum who is also interested in computers.
A)1 only.
B)2 only.
C)3 only.
D)4 only.
E)None of the choices are correct.
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Chapter 9: Property Acquisition and Cost Recovery
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Q1) Businesses may immediately expense research and experimentation expenditures or they may elect to capitalize these costs and amortize them using the straight-line method over a period of not less than 60 months.
A)True
B)False
Q2) Taxpayers may use historical data to determine the recovery period for tax depreciation.
A)True
B)False
Q3) Taylor LLC purchased an automobile for $55,000 on July 5,2018.What is Taylor's maximum depreciation expense for 2018 if its business use percentage is 100 percent?
A)$10,000.
B)$11,000.
C)$18,000.
D)$55,000.
E)None of the choices are correct.
Q4) Goodwill and customer lists are examples of §197 amortizable assets.
A)True
B)False
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Chapter 10: Property Dispositions
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Sample Questions
Q1) Which of the following sections recaptures or recharacterizes only corporate taxpayer's gains?
A)§291.
B)§1239.
C)§1245.
D)Unrecaptured §1250 gains.
E)None of the choices are correct.
Q2) Generally,the amount realized is everything of value received in a sale less selling expenses.
A)True
B)False
Q3) Reid had a business building destroyed in a fire.The old building was purchased for $375,000 and $60,000 of depreciation deductions had been taken.Although the old building had a fair market value of $425,000 at the time of the fire,his insurance proceeds were limited to $400,000.Reid found qualified replacement property which he acquired six months later for $390,000.What is the amount of Reid's realized gain and recognized gain?
Q4) Explain whether the sale of a machine used in a trade or business that is sold at a loss generates an ordinary or capital loss?
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Chapter 11: Entities Overview
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Q1) If a C corporation incurs a net operating loss in 2018,it may carry the loss back two years and forward 20 years to offset income in those years.
A)True
B)False
Q2) In its first year of existence,BYC Corporation (a C corporation)reported a loss for tax purposes of ($40,000).How much tax will BYC pay in year 2 if it reports taxable income from operations of $35,000 in year 2 before any loss carryovers?
Q3) Stacy would like to have SST (a business entity)organized as either an LLC (taxed as a partnership)or as a corporation (taxed as a C corporation)generating a 10 percent annual before-tax return on a $600,000 investment.Stacy's marginal tax rate on ordinary income is 37 percent.Stacy's marginal tax rate on individual capital gains and dividends is 23.8 percent,including the net investment income tax.SST will pay out its after-tax earnings every year to either its members or its shareholders.If SST is taxed as a partnership,Stacy would be subject to a 2.9 percent self-employment tax rate and a .9 percent additional Medicare tax.Assume that SST's income is not qualified business income for purposes of the qualified business income deduction.How much would Stacy have after taxes if SST is organized as either an LLC or a C corporation?
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Chapter 12: Corporate Formations and Operations
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Q1) Antoine transfers property with a tax basis of $500 and a fair market value of $600 to a corporation in exchange for stock with a fair market value of $550 in a transaction that qualifies for deferral under section 351.The corporation assumed a liability of $50 on the property transferred.What is Antoine's tax basis in the stock received in the exchange?
A)$600.
B)$550.
C)$500.
D)$450.
Q2) Carlos transfers property with a tax basis of $500 and a fair market value of $800 to a corporation in exchange for stock with a fair market value of $650 and $50 cash in a transaction that qualifies for deferral under section 351.The corporation assumed a liability of $100 on the property transferred.What is the corporation's tax basis in the property received in the exchange?
A)$800.
B)$600.
C)$550.
D)$450.
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Chapter 13: Corporate Nonliquidating and Liquidating
Distributions
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Q1) Crystal,Inc.is owned equally by John and his wife Arlene,each of whom own 500 shares in the company.Arlene wants to reduce her ownership in the company,and it was decided that the company will redeem 200 of her shares for $5,000 per share on December 31,year 1.Arlene's income tax basis in each share is $1,000.Crystal has current E&P of $1,000,000 and accumulated E&P of $3,000,000.What is the amount and character (capital gain or dividend)recognized by Arlene as a result of the stock redemption,assuming only the "substantially disproportionate with respect to the shareholder" test is applied?
Q2) Packard Corporation reported taxable income of $1,000,000 in year 3 and paid federal income taxes of $210,000.Included in the year 3 taxable income computation was a dividends received deduction of $5,000,a net capital loss carryover from year 2 of $10,000,and gain of $50,000 from an installment sale that took place in year 1.The corporation's current earnings and profits for year 3 would be:
A)$1,015,000.
B)$965,000.
C)$805,000.
D)$755,000.
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Chapter 14: Forming and Operating Partnerships
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Q1) XYZ,LLC has several individual and corporate members.Abe and Joe,individuals with 4/30 year-ends,each have a 23% profits and capital interest.RST,Inc.,a corporation with a 6/30 year end,owns a 4% profits and capital interest while DEF,Inc.,a corporation with an 8/30 year end,owns a 4.9% profits and capital interest.Finally,thirty other calendar year-end individual partners (each with less than a 2% profits and capital interest)own the remaining 45% of the profits and capital interests in XYZ.What tax year-end should XYZ use and which test or rule requires this year-end?
A)4/30,principal partners test.
B)4/30,least aggregate deferral test.
C)12/31,principal partners test.
D)12/31,least aggregate deferral test.
Q2) Partnerships may maintain their capital accounts according to which of the following rules?
A)GAAP.
B)704(b).
C)Tax.
D)Any of the rules.
E)Only GAAP and 704(b).
Q3) What is the difference between a partner's tax basis and at-risk amount?
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Chapter 15: Dispositions of Partnership Interests and Partnership Distributions
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Q1) Hot assets include assets except cash,capital assets and §1231 assets.
A)True
B)False
Q2) Which of the following statements regarding liquidating distributions is true?
A)A partner will recognize a gain when the partnership distributes only money and the amount is greater than the partner's outside basis.
B)A partner will recognize a gain when the partnership distributes only money and hot assets and the inside bases of the distributed assets are greater than the partner's outside basis.
C)A partner will recognize a gain when the partnership distributes money,hot assets,and other property and the inside bases of the distributed assets are greater than the partner's outside basis.
D)A partner will recognize a gain when the partnership distributes only money and the amount is less than the partner's outside basis.
Q3) A partner recognizes gain when she receives cash in excess of her outside basis in a liquidating distribution.
A)True
B)False
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Chapter 16: S Corporations
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Q1) At the beginning of the year,Clampett,Inc.had $100,000 in its AAA,$60,000 of earnings and profits from prior C corporation years.During the year,Clampett,Inc.earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders.Assume that J.D.owns 25% of Clampett,Inc.,his basis in Clampett,Inc.at the beginning of the year is $30,000,and his share of the distribution was $50,000.How much,if any,of the distribution is taxable as a dividend?
A)$0.
B)$10,000.
C)$12,500.
D)$15,000.
E)None of the choices are correct.
Q2) An S corporation shareholder's allocable share of ordinary business income (loss)is classified as self-employment income for tax purposes.
A)True
B)False
Q3) Unlike partnerships,adjustments that decrease an S corporation shareholder's basis may reduce it below zero.
A)True
B)False
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Chapter 17: Individual From Agi Deductions
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Q1) Which of the following taxes will not qualify as an itemized deduction?
A) Personal property taxes assessed on the value of specific property.
B) State, local, and foreign income taxes.
C) Real estate taxes on a residence.
D) Gasoline taxes on personal travel.
E) None of the choices qualify as an itemized deduction.
Q2) The deduction for investment interest in excess of net investment income carries forward to the subsequent year.
A)True
B)False
Q3) Rachel is an accountant who practices as a sole proprietor. This year, Rachel had net business income of $270,000 from her practice. Assume that Rachel pays $50,000 wages to her employees, she has $20,000 of property (unadjusted basis of equipment she purchased last year), has no capital gains, and her taxable income before the deduction for qualified business income is $225,000. Calculate Rachel's deduction for qualified business income.
Q4) To qualify as a charitable deduction the donation must be made by cash or by check.
A)True
B)False
Page 19
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