Taxation of Business Entities Final
Test Solutions
Course Introduction
This course explores the principles and practices concerning the taxation of various business entities including partnerships, corporations, S corporations, and limited liability companies. Students will examine the tax implications of entity formation, operations, distributions, liquidations, and reorganizations, as well as the interplay between federal tax laws and business decision-making. Emphasis is placed on understanding compliance requirements, planning strategies, and the impact of current tax legislation on businesses of different structures.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 2019 22nd Edition by Sally Jones
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Chapter 1: Taxes and Taxing Jurisdictions
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Sample Questions
Q1) Which of the following is not considered administrative authority?
A) Treasury regulations
B) Revenue rulings
C) Tax Court decisions
D) All of the above are administrative authorities
Answer: C
Q2) According to the U.S. Supreme Court, businesses that sell over the internet must collect sales tax only from purchasers living in a state in which the business has a physical presence.
A)True
B)False
Answer: True
Q3) Which of the following is/are not a primary source of authority for the tax law?
A) A revenue ruling published by the Internal Revenue Service
B) Section 162 of the Internal Revenue Code
C) Treasury Reg. §1.351-2
D) All of the above are primary sources of authority
Answer: D
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3
Chapter 2: Policy Standards for a Good Tax
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Q1) Government L levies a 4% excise tax on restaurant meals. It is considering reducing the rate to 2% on meals served in restaurants that ban cigarette and cigar smoking and to increase the rate to 5% in restaurants that allow smoking. Which of the following statements is true?
A) The rate change would improve the neutrality of the excise tax.
B) The rate change would improve the convenience of the tax.
C) The rate change is intended to affect social behavior.
D) Both the rate change would improve the convenience of the tax and the rate change is intended to affect social behavior are true.
Answer: C
Q2) The U.S. individual income tax has always used a progressive rate structure. A)True
B)False
Answer: True
Q3) A dynamic forecast of the revenue effect of a tax rate change assumes that the tax base does not change.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Taxes as Transaction Costs
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Sample Questions
Q1) Mrs Scott loaned $100,000 to her daughter Evelyn, who agreed to pay her mother
$3,000 annual interest on the debt. This loan is an example of a/an:
A) Prohibited transaction
B) Public market transaction
C) Related party transaction
D) Arm's length transaction
Answer: C
Q2) Kent has $200,000 in an investment paying 8% annual interest. Her marginal tax rate is 40%. Which of the following statements is false?
A) Ms. Kent's annual before-tax cash flow from this investment is $16,000.
B) If the interest is tax-exempt, Ms. Kent's annual after-tax cash flow is $16,000.
C) If the interest is taxable, Ms. Kent's annual after-tax cash flow is $6,400.
D) None of the above is false.
Answer: C
Q3) Related party transactions occur in a public market.
A)True
B)False
Answer: False
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Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) The rate at which an item of income is taxed depends on the tax character of the income.
A)True
B)False
Q2) The tax law provides that individuals do not pay tax on the first $250,000 of gain realized on the sale of a principal residence. This rule is an example of the:
A) Entity variable
B) Time period variable
C) Jurisdiction variable
D) Character variable
Q3) Tax planning strategies to enhance NPV must reflect all four tax planning maxims.
A)True
B)False
Q4) According to the assignment of income doctrine, income must be taxed to the person receiving the cash from an income-generating transaction.
A)True
B)False
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Chapter 5: Tax Research
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Sample Questions
Q1) Which of the following is not generally included in a tax research memorandum?
A) A statement of the pertinent facts
B) An analysis of the relevant sources of authority
C) The details of any advice given to the client as part of the research engagement
D) A bill for fees charged to the client for the research engagement
Q2) Which of the following is not a typical strategy for using a commercial tax service?
A) Using the topical index
B) Using the table of contents
C) In an electronic service, using a keyword search
D) All of the above are typical strategies for using a commercial tax service.
Q3) The first step in the tax research process is to locate relevant tax law authority.
A)True
B)False
Q4) The Internal Revenue Code is the primary source of statutory authority for federal income tax law.
A)True
B)False
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Chapter 6: Taxable Income from Business Operations
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Sample Questions
Q1) Which of the following statements most accurately defines taxable income from business operations?
A) Gross income from the sales of goods or performance of services less allowable deductions.
B) Gross income from whatever source derived less allowable deductions.
C) Revenues from business transactions less expenses.
D) Gross income from whatever source derived less expenses.
Q2) Marchal Inc., a calendar year, accrual basis taxpayer, made the following state income tax payments during 2018.
On December 28, Marchal's tax department calculated that the corporation's actual 2018 state income tax liability was $67,140. Consequently, Marchal accrued a $6,140 liability for state income tax payable at year end.
a. Compute Marchal's 2018 state income tax expense per books.
b. If Marchal has not adopted the recurring item exception as its method of accounting for state income taxes, compute Marchal's 2018 federal deduction for state income tax.
Q3) An unfavorable temporary book/tax difference generates a deferred tax asset.
A)True
B)False
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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) Hoopin Oil Inc. was allowed to deduct $5.3 million of intangible drilling and development costs on this year's tax return. Which of the following statements is false?
A) The deduction is a tax preference for Hoopin.
B) The deduction minimizes Hoopin's after-tax cost of locating and preparing oil wells for production.
C) Hoopin was allowed to deduct the costs only because they did not result in any long-term economic benefit.
D) None of the above is false.
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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) Two months ago, Dawes Inc. broke a multi-year lease on office space that it had occupied for four years. Three years ago, Dawes paid $85,300 to install carpeting and new electrical fixtures throughout the office. Accumulated depreciation through the date that Dawes vacated the office was $51,000. What is the tax consequence of Dawes' abandonment of the carpeting and fixtures?
A) Dawes has no tax consequence because it did not sell or exchange these assets.
B) $34,300 capital loss.
C) $34,300 ordinary loss.
D) $34,300 Section 1231 loss.
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Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) Denali, Inc. exchanged realty with a $230,000 adjusted basis for like-kind realty with a $200,000 FMV and $5,000 cash. How much loss may Denali recognize?
A) $5,000
B) $25,000
C) $30,000
D) $0
Q2) Mr Lexon owns investment property with a $719,000 basis. If the property is worth only $500,000, Mr Lexon would prefer a taxable disposition of the property over a like-kind exchange.
A)True
B)False
Q3) The goodwill of one business is never of a like-kind to the goodwill of a different business.
A)True
B)False
Q4) A taxpayer who receives or pays boot in a nontaxable exchange must recognize gain to the extent of the FMV of the boot.
A)True
B)False
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Chapter 10: Sole Proprietorships
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Sample Questions
Q1) Calculate the S corporation's ordinary (non-separately stated) income and indicate which items must be separately stated.
A) Ordinary income, $126,000; long-term capital gain is separately stated.
B) Ordinary income, $120,000; interest income and long-term capital gain are separately stated.
C) Ordinary income, $136,000; nothing is separately stated.
D) Ordinary income, $195,000; interest income, long-term capital gain, and salary costs are separately stated.
Q2) Max is a 10% limited partner in LMN partnership. His adjusted basis in his partnership interest was $50,000 at the beginning of the current year. During the year, the partnership earned $100,000 of ordinary income, incurred a $5,000 capital loss, and paid $1,000 of nondeductible expenses. Max received a distribution of $2,000 from the partnership. Calculate Max's ending adjusted basis in his partnership interest.
A) $142,000
B) $57,400
C) $57,500
D) $59,200
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Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) Loda Inc. made an $8,300 nondeductible charitable contribution and a $2,000 nondeductible political contribution this year. Which of the following statements is true?
A) Both nondeductible contributions are permanent book/tax differences.
B) Both nondeductible contributions are temporary book/tax differences.
C) The nondeductible charitable contribution is a temporary book/tax difference. The nondeductible political contribution is a permanent book/tax difference.
D) The nondeductible charitable contribution is a permanent book/tax difference. The nondeductible political contribution is a temporary book/tax difference.
Q2) Corporate taxable income after December 31, 2017 is taxed using a progressive rate schedule with a top marginal rate of 21%.
A)True
B)False
Q3) A corporation is required to report differences between book and taxable income on either Schedule M-1 or Schedule M-3 of the corporate income tax return.
A)True
B)False
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Page 13
Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) Because of conflicts of interest, shareholders are usually prohibited by law from serving as corporate officers and executives.
A)True
B)False
Q2) Using Appendix A and a 10% discount rate, calculate the present value of expected tax savings and costs on the business earnings for the first 3 years of operations if the business does not make an S corporation election.
A) $52,910 total tax cost
B) $88,250 total tax cost
C) $94,350 total tax cost
D) $118,800 total tax cost
Q3) The net operating losses of a C corporation can be carried forward to reduce its taxable income in future tax years.
A)True
B)False
Q4) Partnerships offer more flexibility in allocating income among owners than S corporations.
A)True
B)False
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Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) Which of the following statements about the foreign tax credit limitation is false?
A) The foreign tax credit cannot exceed the U.S. tax on foreign source income.
B) Foreign tax credits in excess of the limit can be carried forward indefinitely.
C) Cross-crediting of taxes paid in high-tax and low-tax foreign jurisdictions can increase allowable foreign tax credits.
D) The foreign tax credit limitation is based on the ratio of foreign source income to total taxable income.
Q2) All states assessing an income tax use the same formula for apportionment purposes.
A)True
B)False
Q3) Tri-State's income for the current year is $250,000. Approximately how much income will be taxed by Oklahoma?
A) $250,000
B) $218,125
C) $44,375
D) $173,750
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Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Which of the following statements concerning the individual alternative minimum tax (AMT) is true?
A) The calculation of alternative minimum taxable income begins with taxable income for regular tax purposes.
B) A taxpayer with no tax preference items for the year can't be liable for AMT.
C) The standard deduction is not an AMT adjustment in calculating AMTI.
D) The individual AMT rate is a flat 28%.
Q2) Mr and Mrs Jelk file a joint return. They provide 65% of the financial support for David, the 14-year old son of a friend who died three years ago. David lives in the home of his aunt Sarah, who provides 35% of his financial support. Which of the following statements is true?
A) David is a qualifying child of the Jelks.
B) If David earns less than $4,150 gross income this year, he is a qualifying child of the Jelks.
C) If David earns less than $4,150 gross income this year, he is a qualifying relative of the Jelks.
D) David is neither a qualifying child nor a qualifying relative of the Jelks.
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Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) Lawrence is a U.S. citizen who has worked in his employer's Paris office for the past five years. Compute Lawrence's 2018 AGI if his only item of income was his $130,000 salary.
A) $130,000
B) $104,100
C) $25,900
D) $0
Q2) Harold Biggs is provided with $200,000 coverage under his employer's group-term life insurance plan. Which of the following statements is true?
A) The value of $50,000 coverage is included in Harold's gross income.
B) The value of $150,000 coverage is included in Harold's gross income.
C) The value of $200,000 coverage is included in Harold's gross income.
D) Harold's life insurance coverage is a nontaxable fringe benefit.
Q3) Employees who save for retirement through an employer-sponsored qualified plan never include the earnings on their savings in gross income.
A)True
B)False
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Chapter 16: Investment and Personal Financial Planning
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Q1) This year, Mr Chester gave $50,000 to an old friend who has no legal obligation to repay the money. The entire $50,000 is a taxable gift.
A)True
B)False
Q2) Mr Vernon owns stock in two S corporations, Able Corporation and Benson Inc. This year, Mr Vernon had the following income and loss items.
Salary
\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\) \(\quad\)\(\quad\)$ 74,000
Business income from Able \(\quad\)\(\quad\)\(\quad\)$ 20,000
Business loss from Benson \(\quad\)\(\quad\)\(\quad\) $ (33,000 )
If Vernon materially participates in Able's business but not in Benson's business, compute his AGI.
A) $94,000
B) $74,000
C) $61,000
D) $41,000
Q3) Brokerage fees paid when stock is purchased are added to the basis of the stock.
A)True
B)False
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Chapter 17: Tax Consequences of Personal Activities
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Q1) A nondeductible charitable contribution may be carried forward five years.
A)True
B)False
Q2) Congress provides an indirect subsidy to charities by allowing a deduction for charitable contributions.
A)True
B)False
Q3) This year, Mr and Mrs Franklin paid $93,000 interest on a mortgage incurred in 2008 to build their home in Santa Fe. The average principal balance of the mortgage was $1.43 million. The home has an appraised FMV of only $900,000. Compute the Franklin's itemized deduction for their home mortgage interest.
A) $65,035
B) $58,531
C) $93,000
D) None of the above
Q4) An activity will be classified as a hobby if the taxpayer fails to make a profit from the activity.
A)True
B)False
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Chapter 18: The Tax Compliance Process
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Q1) Mr and Mrs Clyde were married for 21 years before Mrs Clyde divorced her husband in 2017. This year, the IRS determined that the Clydes underpaid their 2016 tax by $19,650. In which case would Mrs Clyde be relieved of liability for the underpayment under the innocent spouse rule?
A) Mrs Clyde did not read through the Form 1040 before she signed it.
B) Mrs Clyde remarried this year and is now Mrs Novak.
C) Mr. Clyde was the sole income earner during the entire marriage.
D) None of the above.
Q2) The fact that a taxpayer receives a refund check indicates that the IRS is satisfied with the accuracy of the taxpayer's return.
A)True
B)False
Q3) If a taxpayer fails to pay a deficiency after receiving notice of the deficiency, the IRS can garnish the taxpayer's salary or wage to settle the liability.
A)True
B)False
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