Taxation of Business Entities
Question Bank
Course Introduction
This course provides an in-depth examination of the federal income taxation of business entities, including corporations, partnerships, and limited liability companies. Students will explore the tax implications of entity choice, formation, operation, distributions, and liquidation, as well as the impact of tax law on business transactions and decision-making. Key topics include taxable income determination, tax compliance requirements, special tax allocations, double taxation of corporations, pass-through taxation for partnerships and LLCs, and the consequences of mergers, acquisitions, and reorganizations. The course will emphasize practical application through analysis of real-world scenarios and current tax regulations.
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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Q1) 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
Q2) SJF Inc., which has its corporate offices in Boise, Idaho, conducts business in Idaho, Oregon, California, and British Columbia, Canada. Which of the following statements is true?
A) SJF must pay income tax only to Idaho and the United States.
B) SJF may be required to pay income tax to Idaho, Oregon, California, British Columbia, the United States, and Canada.
C) SJF must pay income tax only to Idaho, Oregon, California, and the United States.
D) SJF may be required to pay income tax to either the United States or to Canada, but not to both.
Answer: B
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Chapter 2: Policy Standards for a Good Tax
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Q1) The federal government is not required to pay interest on the national debt.
A)True
B)False
Answer: False
Q2) A progressive rate structure and a proportionate rate structure both result in vertical equity across taxpayers.
A)True
B)False
Answer: True
Q3) 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 statements are true.
Answer: D
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Chapter 3: Taxes as Transaction Costs
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Q1) Which of the following is not a related party transaction?
A) Acme Corporation leases office space to Norton Company. Mr. and Mrs Norton own Norton Company and 65% of Acme Corporation's stock.
B) BBD Inc. licenses a patent from Nugo Inc., which owns 82% of BBD's outstanding stock.
C) Beth Teal pays $15,000 a year to her gardener, Ben. Beth is Ben's grandmother.
D) All the transactions are between related parties.
Answer: D
Q2) Which of the following statements about different tax rates over time is false?
A) A 5% increase in the tax rate for year 10 has less effect on NPV than a 5% increase in the tax rate for year 4.
B) Future tax rates used in NPV calculations are estimates because Congress can change the statutory rates every year.
C) A NPV calculation must assume a constant tax rate for all future periods.
D) A firm's future tax rate may change because of increases or decreases in future taxable income.
Answer: C
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Page 5
Chapter 4: Maxims of Income Tax Planning
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Q1) The time period variable is based on the time value of money.
A)True
B)False
Q2) Which of the following statements about implicit and explicit taxes is false?
A) The amount of implicit tax on an investment depends on the owner's marginal tax rate.
B) The taxpayer pays an explicit tax to the taxing jurisdiction.
C) An investment yielding ordinary income taxed at the regular tax rates should not have an implicit tax.
D) None of the above is false.
Q3) A reduced market rate of return on a tax-favored investment is called an implicit tax.
A)True
B)False
Q4) The substance over form doctrine allows the IRS to look through the legal formalities of a transaction to determine its true economic nature.
A)True
B)False
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Chapter 5: Tax Research
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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) A revenue ruling cannot be relied on as authority by any taxpayer other than the taxpayer for whom the ruling was issued.
A)True
B)False
Q3) When analyzing relevant legal authority:
A) The researcher is finished only when an unambiguous answer to the research question has been located.
B) Different sources of authority may provide conflicting answers.
C) Interpretation and judgment on the part of the researcher is rarely required.
D) The researcher should never give an unqualified answer to any research question.
Q4) A single tax issue may result in multiple research questions.
A)True
B)False
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Page 7
Chapter 6: Taxable Income from Business Operations
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Q1) GH&F is a calendar year, accrual basis taxpayer. In October 2018, GH&F received a $18,000 cash payment from a tenant who leases space in a commercial office building that GH&F owns. The payment was rent for the 18-month period beginning on November 1, 2018. As a result of the payment, GH&F should report:
A) $2,000 book income and taxable income
B) $2,000 book income and $18,000 taxable income
C) $18,000 book income and taxable income
D) None of the above
Q2) Elcox Company, a calendar year, cash basis taxpayer, paid $950 to purchase eight months' worth of office supplies on December 12. Elcox can deduct $950 in the year of payment.
A)True
B)False
Q3) Using a 21% rate, compute Goff's tax expense per books and tax payable.
A) Tax expense per books $229,767; tax payable $229,767.
B) Tax expense per books $329,559; tax payable $329,559.
C) Tax expense per books $213,402; tax payable $229,767.
D) Tax expense per books $229,767; tax payable $329,559.
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Q1) Moses Inc. purchased office furniture for $8,200 plus $492 sales tax and a $150 delivery charge. Which of the following is true?
A) Moses' tax basis in the furniture is $8,842.
B) Moses' tax basis in the furniture is $8,692, and it can deduct the delivery charge.
C) Moses' tax basis in the furniture is $8,350, and it can deduct the sales tax.
D) Moses' tax basis in the furniture is $8,200, and it can deduct the sales tax and delivery charge.
Q2) Deitle Inc. manufactures small appliances. This year, Deitle capitalized $3,679,000 indirect costs to inventory for book purposes and $3,865,000 indirect costs to inventory for tax purposes. The consequence of the different accounting methods is a $186,000:
A) Permanent unfavorable book/tax difference
B) Permanent favorable book/tax difference
C) Temporary unfavorable book/tax difference
D) Temporary favorable book/tax difference
Q3) Environmental clean-up costs are generally deductible in the year incurred.
A)True
B)False
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Page 9
Chapter 8: Property Dispositions
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Sample Questions
Q1) N&B Inc. sold land worth $385,000. The purchaser paid $80,000 cash and assumed N&B's $305,000 mortgage on the land. N&B's amount realized on sale is $385,000.
A)True
B)False
Q2) B&I Inc. sold a commercial office building used in the corporate business for $862,000. B&I purchased the building in 2008 for a cost of $700,000 and had deducted $167,200 MACRS depreciation through date of sale. B&I should characterize the $329,200 gain recognized on sale as:
A) $167,200 ordinary gain and $162,000 Section 1231 gain
B) Section 1231 gain
C) Capital gain
D) None of the above
Q3) Sandy Cole realized a loss on sale of an investment asset to her mother, Lynne. If the facts and circumstances prove that the selling price was an arm's length market price, Sandy can recognize the loss.
A)True
B)False
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Chapter 9: Nontaxable Exchanges
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Q1) Tax neutrality for asset exchanges is the exception rather than the rule.
A)True
B)False
Q2) Oxono Company realized a $74,900 gain on the exchange of one asset for another asset (no cash was included in the exchange). The assets were like-kind properties. Oxono reported the gain as revenue on its financial statements. Which of the following is true?
A) The exchange resulted in a favorable temporary book/tax difference.
B) The exchange resulted in a favorable permanent book/tax difference.
C) The exchange resulted in an unfavorable temporary book/tax difference.
D) The exchange resulted in an unfavorable permanent book/tax difference.
Q3) A partnership always takes a carryover basis in property received from a partner in exchange for an equity interest in the partnership.
A)True
B)False
Q4) A taxpayer who exchanges property for an interest in a partnership never recognizes gain or loss on the exchange.
A)True
B)False
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Chapter 10: Sole Proprietorships
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Sample Questions
Q1) What is Cramer's tax basis in its partnership interest?
A) $500,000
B) $1,200,000
C) $850,000
D) $650,000
Q2) In contrast to a partnership, every member of an LLC has limited liability for the LLC's debts.
A)True
B)False
Q3) What is Mr Chips' tax basis in its partnership interest?
A) $500,000
B) $850,000
C) $650,000
D) $300,000
Q4) The FICA taxes authorized by the Federal Insurance Contribution Act is imposed upon all of the employee's wages for the year.
A)True
B)False
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Page 12
Chapter 11: The Corporate Taxpayer
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Q1) After 2017, a 1.4% excise tax applies to the net investment income of all colleges and universities.
A)True
B)False
Q2) Borough, Inc. is entitled to a rehabilitation credit of $500,000 for its current tax year. The corporation's regular tax liability is $450,000. No estimated tax payments have been made. Which of the following statements is true?
A) The corporation should receive a tax refund for the current year.
B) The portion of the rehabilitation credit that cannot be used this year will be lost.
C) The current year credit equals 20 percent of the total credit allowed for rehabilitation of a certified historic structure.
D) The credit is available for restoration of a building that is at least ten years old.
Q3) After 2017, a 37% excise tax applies to compensation in excess of $1 million paid to executives of tax-exempt organizations.
A)True
B)False
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Chapter 12: The Choice of Business Entity
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Q1) If a new business organized as a C corporation incurs start-up losses, the tax benefits of those losses will be recognized immediately.
A)True
B)False
Q2) Gwen and Travis organized a new business as an LLC in which they own equal interests. The new business generated a $10,000 operating loss its first year. Travis has no other taxable income for the current year, but expects to have sufficient taxable income in future years to pay tax in the 24% tax bracket. Which of the following statements regarding Travis' tax savings from the current LLC loss is true?
A) Travis can carry his share of LLC loss back two years as a net operating loss, and request an immediate tax refund of $1,200.
B) Travis can carry his share of LLC loss forward, and will get tax savings only when he generates future income.
C) Travis can only use his share of the LLC loss in the current year, and will receive no tax savings.
D) The LLC will reallocate Travis share of the loss to Gwen, who can claim $1,750 of additional tax savings.
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Page 14
Chapter 13: Jurisdictional Issues in Business Taxation
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Q1) The foreign tax credit is available only for foreign income, excise, value-added, sales, property and transfer taxes.
A)True
B)False
Q2) Fallon Inc., a U.S. corporation, owns stock in several foreign corporations. This year, Fallon received $420,000 as a dividend from Mars Corporation, and $225,000 as a dividend from Jupiter Inc. Mars is a foreign corporation in which Fallon has owned 8 percent of the outstanding stock for ten years. Jupiter is a foreign corporation in which Fallon has owned 17 percent of the outstanding stock for two years. Compute Fallon's allowable dividends-received deduction for these foreign dividends.
A) $420,000
B) $225,000
C) $665,000
D) $0
Q3) Koscil Inc. had the following taxable income. Corporate tax rate schedule.
U.S. source income \(\quad\)\(\quad\)\(\quad\)$ 1,435,000
Foreign source income \(\quad\)\(\quad\)\(\quad\)850,000
Taxable income \(\quad\)\(\quad\)\(\quad\)\(\quad\) $ 2,285,000
Koscil paid $315,000 foreign income tax. Compute its U.S. income tax liability.
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Page 15
Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) The Section 199A deduction always has the impact of lowering AGI.
A)True
B)False
Q2) Mr and Mrs Daniels, ages 45, and 42, had the following income items in 2018:
Salaries and wages
\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\) \(\quad\)\(\quad\)$ 122,500
Interest income
\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)
\(\quad\)\(\quad\)\(\quad\)\(\quad\)6,300
Dividends eligible for 15% rate \(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\) \(\quad\) 4,000
Capital gain eligible for 15% rate
\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)1,900
Mr and Mrs Daniels have no dependents and claim the standard deduction. Compute their income tax liability on a joint return.
A) $15,820
B) $19,978
C) $22,348
D) None of the above.
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Page 16
Chapter 15: Compensation and Retirement Planning
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Q1) Julie, a single individual, is employed by Dashell Inc. but doesn't participate in any employer-sponsored retirement plan. Julie's annual contribution to her traditional IRA is deductible.
A)True
B)False
Q2) Vernon Inc. needs an additional worker on a multi-year project. Vernon could either hire an employee for a $72,000 annual salary or engage an independent contractor for a $75,000 annual fee. If Vernon's marginal income tax rate is 21%, which option minimizes the after-tax cost of obtaining the worker?
Q3) In 2018, Dargo Inc., a calendar year corporation, accrued a $75,000 year-end bonus payable to its communications director. Dargo and the director are not related parties. Dargo paid the bonus to the director on February 8, 2019. Dargo can deduct the bonus in 2018.
A)True B)False
Q4) Stock options are a form of compensation that requires a substantial cash outlay by the corporate employer.
A)True B)False
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Chapter 16: Investment and Personal Financial Planning
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Q1) Mr and Mrs Holt made no taxable gifts during their lifetimes. Mrs Holt died two years ago. Her estate tax return shows that she owed no estate tax and had an $800,000 unused lifetime exclusion. Mr Hold died in 2018. The lifetime transfer tax exclusion available to his estate is $12 million.
A)True
B)False
Q2) Fifteen years ago, Lenny purchased an insurance policy on his own life. The policy provides a $3 million death benefit. Lenny has paid $682,000 of premiums, and the cash surrender value of the policy is $725,000. He plans to liquidate the policy to generate cash for his business. If Lenny's marginal tax rate is 35%, how much after-tax cash will the liquidation generate?
A) $725,000
B) $709,950
C) $682,000
D) $471,250
Q3) Gift tax is based on the donor's adjusted tax basis in the transferred property.
A)True
B)False
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Chapter 17: Tax Consequences of Personal Activities
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Q1) Ruang, a single taxpayer, purchased her principal residence on August 19, 2018 and financed the purchase with a mortgage secured by the residence. In 2018, the average balance of the mortgage was $817,000, and Ms Ruang paid $35,000 of mortgage interest. How much of this interest is an itemized deduction?
A) $0
B) $20,270
C) $32,130
D) $35,000
Q2) Recipients of the Nobel Peace Prize must include the prize in gross income.
A)True
B)False
Q3) Which of the following statements about divorce settlements is true?
A) Property transfers pursuant to divorce have no income tax consequences.
B) Child support is excluded from the recipient's gross income.
C) Child support is an above-the-line deduction for the payer.
D) Statements A. and B. are true.
Q4) A nondeductible charitable contribution may be carried forward five years.
A)True
B)False
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Chapter 18: The Tax Compliance Process
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Q1) Only the government may appeal a tax case to the U.S. Supreme Court.
A)True
B)False
Q2) The IRS can't impose a negligence penalty on an individual who relied on the advice of a CPA in preparing his tax return.
A)True
B)False
Q3) Which of the following statements about taxpayer negligence is false?
A) A taxpayer who makes a good faith effort to comply with the tax law is not negligent.
B) A taxpayer who keeps complete and careful tax records is less likely to incur a negligence penalty than a taxpayer with no records.
C) A taxpayer who cooperates with the revenue agent is less likely to incur a negligence penalty than an uncooperative taxpayer.
D) A taxpayer who relies on the advice of a tax professional has a guaranteed defense against the negligence penalty.
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