Taxation for Business and Investment Pre-Test Questions
Course Introduction
This course provides a comprehensive overview of taxation principles as they apply to businesses and investment activities. It covers key topics such as the structure of tax systems, corporate income taxation, partnership and sole proprietorship tax issues, and the treatment of investment income and capital gains. Students will learn how to interpret tax laws and regulations, apply tax planning strategies to minimize liabilities, and understand the tax implications of various business structures and investment decisions. Through case studies and real-world scenarios, the course emphasizes ethical considerations, compliance requirements, and the impact of tax policy on business operations and investment choices.
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 Internal Revenue Code is written by the Internal Revenue Service.
A)True
B)False
Answer: False
Q2) A sales tax is an example of an activity-based tax.
A)True
B)False
Answer: False
Q3) Payment of a tax entitles the payer to a specific good or service from the government.
A)True
B)False
Answer: False
Q4) Which of the following is an example of an activity-based tax?
A) A tax on business' net income
B) An excise tax
C) A gift tax on the transfer of assets by gift
D) Both A. and C.
Answer: A
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Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) A static forecast of the incremental revenue from a tax rate increase presumes that:
A) The tax base will not change because of the rate increase.
B) The tax base will increase by the same proportion as the rate increase.
C) The tax base will decrease by the same proportion as the rate increase.
D) The tax rate and the tax base are correlated.
Answer: A
Q2) Which of the following statements concerning a regressive tax rate structure is true?
A) A regressive tax rate structure is justified by the tax policy of distributive justice.
B) A regressive rate structure is justified by the theory of the declining marginal utility of income.
C) Under a regressive rate structure, the average tax rate for high-income taxpayers is less than the marginal tax rate.
D) None of the above statements is true.
Answer: D
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4
Chapter 3: Taxes As Transaction Costs
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Q1) When the tax law applies differentially to transaction alternatives, decisions should focus on before-tax earnings.
A)True
B)False
Answer: False
Q2) Which of the following statement about private market transactions is false?
A) Both parties have flexibility in determining the legal and financial characteristics of the transaction.
B) The parties negotiate directly with each other.
C) The parties are dealing at arm's length.
D) The parties must engage in unilateral instead of bilateral tax planning.
Answer: D
Q3) The tax cost of a transaction depends on the taxpayer's average tax rate for the year.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) Planning opportunities are created when the tax law applies differentially to alternative business transactions.
A)True
B)False
Q2) Which of the following statements about tax avoidance and tax evasion is false?
A) Tax avoidance is legal, while tax evasion is illegal.
B) The difference between avoidance and evasion is clearly defined in the tax law.
C) Tax evasion is a federal felony offence.
D) Taxpayers should not regard tax avoidance as unethical.
Q3) Elton Company plans to build a new facility to manufacture backpacks. Elton sells its backpacks across the country for $300 per pack. It could locate the plan in state A, which levies a 5 percent tax on business income. The estimated manufacturing cost per pack in state A would be $120. Alternatively, Elton could locate the plan in state B, which levies a 3 percent tax on business income. The estimated manufacturing cost in state B is $126 per pack. In which state should Elton locate its plant? Provide calculations to support your conclusion.
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Chapter 5: Tax Research
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Sample Questions
Q1) 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.
Q2) The use of secondary authorities might be appropriate as part of which step in the research process?
A) Understand the client's transaction and ascertain the facts
B) Identify the tax issues, problems, or opportunities suggested by the facts and formulate specific research questions
C) Locate relevant tax law authority
D) Document your research and communicate your conclusions
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Chapter 6: Taxable Income From Business Operations
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Sample Questions
Q1) Which of the following statements regarding book/tax differences is false?
A) A permanent book/tax difference affects only the year in which it occurs.
B) A temporary book/tax difference affects two or more tax years.
C) Temporary book/tax differences arising in the current tax year will reverse in the future in one or more tax years.
D) The tax cost or benefit of a permanent book/tax difference is recouped over time.
Q2) Jethro Company, an accrual basis taxpayer, had a $10,000 overdue account payable to a major supplier. The supplier agreed to settle the account for $9,000 cash from Jethro. Which of the following statements is true?
A) Jethro recognizes $1,000 income because of the settlement.
B) Jethro recognizes no income because of the settlement.
C) Jethro can deduct the $9,000 payment.
D) Jethro can deduct a $1,000 bad debt expense.
Q3) According to the GAAP principle of conservatism, firms should delay the realization of uncertain revenues and gains and accelerate the realization of uncertain expenses and losses.
A)True
B)False
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8
Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) Ferelli Inc. is a calendar year taxpayer. On September 1, Ferelli signed a 24-month lease on 3,600 square feet of commercial office space and paid a $3,240 fee to the agent who located the space and negotiated the lease. Ferelli paid $5,900 to install new overhead lighting in the office space. The lighting is 7-year recovery property. Compute Ferelli's current-year cost recovery deduction with respect to the $9,140 costs associated with the office space.
A) $540
B) $843
C) $1,523
D) $1,383
Q2) Which of the following statements about the depletion deduction is false?
A) Firms can deduct the greater of cost depletion or percentage depletion for the year.
B) Percentage depletion is a tax preference item.
C) The depletion deduction can never exceed the unrecovered cost basis in the depletable asset.
D) Percentage depletion is not based on any actual decrease in the expected productive value of a mine or well.
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Page 9
Chapter 8: Property Dispositions
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Sample Questions
Q1) Mr. Beck sold real property with a $140,000 adjusted basis for $255,000. The buyer paid $148,000 cash and assumed Mr. Beck's $107,000 mortgage on the realty. Mr. Beck's realized gain or loss on sale is
A) $115,000 gain
B) $8,000 gain
C) $33,000 loss
D) $0 gain or loss
Q2) Philp Inc. sold equipment with a $132,900 adjusted tax basis for $200,000. The purchaser paid $20,000 in cash and assumed Philp's $180,000 mortgage on the asset. Compute Philp's net cash flow from the sale assuming a 35% tax rate.
A) $23,485
B) $20,000
C) -0-
D) None of the above
Q3) If a taxpayer sells business realty that was depreciated using the straightline method, the entire gain is characterized as Section 1231 gain.
A)True
B)False
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Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) Mrs. Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700) to M&W Inc. in exchange for a 36% interest in M&W Partnership. Compute M&W's recognized gain on its exchange of an equity interest for property and determine M&W's tax basis in the property received from Mrs. Brinkley.
A) No gain recognized; $340,200 tax basis in property
B) No gain recognized; $111,700 tax basis in property
C) $340,200 gain recognized; $111,700 tax basis in property
D) $111,700 gain recognized; $111,700 tax basis in property
Q2) 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 these statements is false.
Q3) Tibco Inc. exchanged an equity interest in ABM Partnership for an equity interest in Jolla Partnership. This exchange is taxable.
A)True
B)False
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11
Chapter 10: Sole Proprietorships, Partnerships, Llcs, and S Corporations
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Sample Questions
Q1) If a business is formed as an S corporation, its income may be subject to double taxation.
A)True
B)False
Q2) A partner's distributive share of partnership nondeductible expenses does not decrease his or her tax basis in the partnership interest.
A)True
B)False
Q3) Cramer Corporation and Mr. Chips formed a general partnership. 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
Q4) Refer to the facts in the preceding problem. Ted is a 20 percent general partner in Bevo.
Bevo Partnership had the following financial activity for the year:
Page 12
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Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) Which of the following is a means to avoid the double taxation burden imposed on the profits of corporations?
A) Treat all corporations as passthrough 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.
Q2) Corporations are rarely targeted in political debates over taxation.
A)True
B)False
Q3) The federal tax law considers the member corporations of an affiliated group to be a single entity for federal tax purposes. An example of this treatment is the requirement to share the 15% tax bracket.
A)True
B)False
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Chapter 12: The Choice of Business Entity
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Q1) Individual shareholders who create a brother-sister controlled group do not derive any federal tax advantage from doing so.
A)True
B)False
Q2) The accumulated earnings tax is imposed on a partnership formed for or availed of for the purpose of avoiding the income tax with respect to its owners by permitting earnings and profits to accumulate instead of being divided or distributed.
A)True
B)False
Q3) Andrews Corporation owns all of the outstanding stock of Zeta Inc. The two corporations do not file a consolidated income tax return. This year, each corporation recorded $200,000 of taxable income. What is the regular tax liability of each corporation?
A) $68,000
B) $61,250
C) $122,500
D) $136,000
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Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) Korn Co., was incorporated in Delaware. It has production, distribution, and sales facilities in Kansas and Nebraska. All of Korn's customers reside in Kansas or Nebraska. Assume that both states use the UDITPA formula for apportionment of income. The corporation is investing in new equipment that cost $900,000. The equipment could be used in either the Kansas or Nebraska production facilities. Assume that Kansas' corporate income tax rate is 7% and Nebraska's is 8.5%. Should the equipment be placed in Kansas or Nebraska to minimize Korn's state income tax?
A) Kansas.
B) Nebraska.
C) Either state, because state income tax will be unaffected by this choice.
D) Korn should place the equipment in a third state in which it does not have nexus.
Q2) The payroll factor in the UDITPA state income tax apportionment formula always includes executive compensation.
A)True
B)False
Q3) Excess foreign tax credits can only be carried to future tax years.
A)True
B)False
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Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Every individual taxpayer is entitled to an AMT exemption, the amount of which varies with filing status.
A)True
B)False
Q2) Mr. and Mrs. Anderson file a joint return. They provide more than 50% of the financial support of their two children, Dana, age 26, and John, age 17. Both children live in the Andersons' home. Dana earned $7,100 from a part-time job, while John earned no income this year. Which of the following statements is true?
A) Both Dana and John are qualifying children of the Andersons.
B) Dana is a qualifying relative and John is a qualifying child of the Andersons.
C) John is a qualifying child of the Andersons.
D) Neither Dana nor John is a qualifying child of the Andersons.
Q3) Individual taxpayers can obtain an automatic extension of time to file a calendar year Form 1040 until October 15 of the following year.
A)True
B)False
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Page 16
Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) Lansing Corporation, a publicly held company with a 35% marginal tax rate, paid its CEO an annual salary of $2.3 million. Ignoring payroll taxes, calculate the after-tax cost of this payment.
A) $2.3 million
B) $1.495 million
C) $1.95 million
D) $0
Q2) Louise, age 51, quit her job and received a $70,000 distribution from her employer-sponsored qualified retirement plan. She immediately contributed $50,000 to a rollover IRA and used the remaining $20,000 to purchase a car. Compute the tax cost of the distribution if Louise has a 33% marginal tax rate on ordinary income.
A) $6,600
B) $8,600
C) $23,100
D) $30,100
Q3) Employers must withhold state and federal income tax from compensation paid to independent contractors.
A)True
B)False
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Page 17
Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) Qualified dividend income earned by an individual taxpayer is taxed at a maximum income tax rate of 20%.
A)True
B)False
Q2) Twenty years ago, Mrs. Cole purchased an insurance policy on her own life. Mrs. Cole died this year, and the policy paid the $300,000 death benefit to her son Jeffrey. During her life, Mrs. Cole paid total premiums of $71,200 on the policy. Which of the following statements is true?
A) Jeffrey must recognize the $300,000 payment as ordinary income.
B) Jeffrey must recognize $228,800 of the $300,000 payment as capital gain.
C) Jeffrey can exclude the $300,000 payment from gross income.
D) Jeffrey must recognize $228,800 of the $300,000 payment as ordinary income.
Q3) All gratuitous transfers of property are subject to gift tax.
A)True
B)False
Q4) Brokerage fees paid when stock is purchased are added to the basis of the stock.
A)True
B)False
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Page 18
Chapter 17: Tax Consequences of Personal Activities
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Q1) A flood destroyed an antique Persian rug owned by Mr. and Mrs. McConnell. The couple purchased the rug for $13,000 fifteen years ago, but its appraised FMV before the flood was $42,500. Unfortunately, their homeowners' insurance policy does not cover flood damage. Compute the McConnells' casualty loss resulting from the flood.
A) $41,900
B) $42,000
C) $13,000
D) $12,900
Q2) Any gain recognized on the sale of a personal residence is excluded from the seller's gross income.
A)True
B)False
Q3) Chad won a car valued at $25,000 from a game show. Because he immediately donated the car to the Red Cross, Chad can exclude $25,000 from gross income.
A)True
B)False
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19
Chapter 18: The Tax Compliance Process
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Q1) Taxpayers who win their case in court are automatically entitled to recover litigation expenses from the government.
A)True
B)False
Q2) Taxpayers who can't complete their tax return by the filing date can request an automatic extension of time to file the return and pay any balance of tax due.
A)True
B)False
Q3) Mr. and Mrs. Dint filed their 2014 Form 1040 on January 28, 2015. Assuming that the return does not contain any significant errors, what is the latest date that the IRS can assess any additional 2014 tax?
A) December 31, 2017
B) January 28, 2018
C) April 15, 2018
D) December 31, 2018
Q4) Only one spouse must sign a jointly filed Form 1040.
A)True
B)False
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