Taxation of Business Entities Test Bank
Course Introduction
This course provides a comprehensive overview of the federal income taxation of various business entities, including corporations, partnerships, S corporations, and limited liability companies. Students will examine the tax implications of business formation, operations, distributions, reorganizations, and liquidations. The course also covers the differences in tax treatment among entity types, special tax issues such as double taxation and pass-through taxation, and relevant compliance and reporting requirements. Real-world scenarios and current tax laws are emphasized to prepare students for practical decision-making and professional responsibilities in tax planning and compliance for business entities.
Recommended Textbook Principles of Taxation for Business and Investment Planning 2018 21st Edition by Sally Jones
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1806 Verified Questions
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Chapter 1: Taxes and Taxing Jurisdictions
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Q1) A business that operates in more than one state is required to pay state income tax only to the state in which it is incorporated.
A)True
B)False
Answer: False
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
Q3) A sales tax is an example of an activity-based tax.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) The federal government is not required to pay interest on the national debt.
A)True
B)False
Answer: False
Q2) Which of the following statements about a regressive tax rate structure is false?
A)A regressive rate structure cannot result in vertical equity.
B)Regressive rates decrease as the tax base increases.
C)A regressive rate structure places a proportionally heavier tax burden on taxpayers with smaller tax bases than persons with greater tax bases.
D)None of the above is false.
Answer: A
Q3) Which of the following describes a tax that meets the standard of convenience?
A)A tax that the government can administer without excessive cost.
B)A tax that is easy for taxpayers to compute and pay.
C)A tax that minimizes the opportunity for noncompliance.
D)All of the above describe a convenient tax.
Answer: D
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4
Chapter 3: Taxes As Transaction Costs
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Q1) The tax savings from a transaction represents a cash inflow.
A)True
B)False
Answer: True
Q2) A cash flow consisting of a constant dollar amount to be received for a specific number of future periods is called an annuity.
A)True
B)False
Answer: True
Q3) The transacting parties can engage in bilateral tax planning when a transaction occurs in a:
A)Public market
B)Private market
C)Secondary market
D)None of the above
Answer: B
Q4) The tax law prohibits related party transactions.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Maxims of Income Tax Planning
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Q1) Carter Inc.and CCC Inc.are owned by the same family.Carter's marginal tax rate is 30%,and CCC's marginal tax rate is 20%.Carter has the opportunity to engage in a transaction that will generate $500,000 taxable cash flow.Alternatively,CCC could engage in the transaction.However,CCC would incur an extra $42,500 deductible cash expense with respect to the transaction.Which of the following statements is true?
A)CCC should engage in the transaction to generate $16,000 more after-tax cash flow.
B)Carter should engage in the transaction to avoid the extra expense.
C)CCC should engage in the transaction because it has the lower marginal tax rate.
D)Because Carter and CCC are owned by the same family,the family is indifferent as to which corporation engages in the transaction.
Q2) Mrs.Day structures a transaction to shift income from her 20Y1 tax year to her 20Y2 tax year.This tax planning strategy may be taking advantage of the:
A)Entity variable
B)Time period variable
C)Jurisdiction variable
D)Character variable
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Chapter 5: Tax Research
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Sample Questions
Q1) Which of the following is not primary authority on which to base research conclusions?
A)Journal of Taxation article written by a professor.
B)Revenue ruling.
C)U)S.Tax Court decision.
D)U)S.Supreme Court decision.
Q2) In locating relevant authorities:
A)Only a novice researcher will use secondary authorities as a guide.
B)Experienced researchers always conduct their search in exactly the same way for every research project.
C)Tax researchers may consult more than one tax service.
D)Skilled researchers usually consult a broader range of library materials than novice researchers.
Q3) Technical advice memoranda are considered primary authority for any taxpayer in a similar tax situation.
A)True B)False
Q4) Revenue procedures are a type of secondary authority.
A)True B)False
Page 7
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Chapter 6: Taxable Income From Business Operations
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Sample Questions
Q1) The principle of conservatism reflected by GAAP is identical to the principle of conservatism reflected in the tax law.
A)True
B)False
Q2) Accurate measurement of taxable income is the only objective of the federal income tax laws.
A)True
B)False
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
Q4) Murray Inc.,a calendar year,accrual basis corporation,accrued $946,000 salary and wage expense at the end of 2016.Murray paid the entire amount of the accrued liability on January 13,2017.Murray can deduct the entire $946,000 accrued expense in 2016. A)True
B)False
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Page 8
Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) Dorian,a calendar year corporation,purchased $1,568,000 of equipment on May 3.This was Dorian's only purchase of depreciable property for the year.If the equipment has a 10-year recovery period,refer to Table 7.2 and compute Dorian's first and second-year MACRS depreciation.(Disregard the Section 179 deduction and bonus depreciation in making your calculation.)
A)First year $156,800; second year $282,240
B)First year $78,400; second year $282,240
C)First year $156,800; second year $245,016
D)None of the above
Q2) Which of the following capitalized cost is not amortizable for tax purposes?
A)Purchase cost of a partnership interest
B)Purchase cost of business goodwill
C)Leasehold cost
D)Purchase cost of a patent
Q3) Research and experimental expenditures are not deductible if they result in the development of a patented formula or process.
A)True
B)False
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Chapter 8: Property Dispositions
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Sample Questions
Q1) Schatz Corporation generated $8,083,000 ordinary business income and recognized a $73,900 net capital gain on the sale of assets.Which of the following statements is true?
A)Schatz must pay tax at the regular corporate rates on $8,156,900 taxable income.
B)Schatz must pay tax at the regular corporate rates on $8,083,000 taxable income.The $73,900 capital gain is eligible for a preferential tax rate.
C)Schatz's net capital gain results in a permanent book/tax difference.
D)None of the above is true.
Q2) Mrs.Stile owns investment land subject to a $600,000 nonrecourse mortgage.Her basis in the land is $212,000,and the land's appraised FMV is $575,000.Mrs.Stile is considering defaulting on the mortgage and allowing the creditor to foreclose.If Mrs.Stile disposes of the land through a foreclosure,she will recognize:
A)$212,000 capital loss
B)$212,000 ordinary abandonment loss
C)$363,000 capital gain
D)$388,000 capital gain
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Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) Loonis Inc.and Rhea Company formed LooNR Inc.by transferring business assets in exchange for 1,000 shares of LooNR common stock.Loonis transferred assets with a $820,000 FMV and a $444,000 adjusted tax basis and received 820 shares.Rhea transferred assets with a $180,000 FMV and a $75,000 adjusted tax basis and received 180 shares.Which of the following statements is true?
A)The FMV of Rhea's 180 shares is $180,000.
B)Rhea's exchange of assets for stock is taxable because Rhea is not in control of LooNR immediately after the exchange.
C)LooNR recognizes a $105,000 gain on the exchange of its stock for Rhea's assets.
D)None of the above is true.
Q2) A taxpayer who receives boot in a nontaxable exchange must recognize gain equal to the lesser of the FMV of the boot or the gain realized.
A)True
B)False
Q3) The wash sale rule can result in the nonrecognition of both gains and losses.
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) A limited liability company with more than one member is generally considered a partnership for federal tax purposes.
A)True
B)False
Q2) Jackie contributed $60,000 in cash to a partnership for a 50% interest.This year,the partnership earned $200,000 ordinary business income,made a $20,000 contribution to the United Way,and distributed $25,000 cash to Jackie.Her tax basis in the partnership at year end is:
A)$110,000
B)$85,000
C)$125,000
D)$215,000
Q3) Which of the following items would be separately stated instead of included in ordinary income when reported by a partnership?
A)Municipal bond interest income
B)Capital loss
C)Dividend income
D)All of the above items would be separately stated
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Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) Corporations are rarely targeted in political debates over taxation.
A)True
B)False
Q2) AMT adjustments can only increase a corporation's alternative minimum taxable income.
A)True
B)False
Q3) Morton Inc.is a Kansas corporation engaged exclusively in domestic manufacturing.This year,it earned $500,000 of qualified production income,which also equals its taxable income before the domestic manufacturing deduction.It paid compensation of $200,000 to its workforce.Calculate Morton's domestic production activities deduction and taxable income:
A)Deduction $45,000; taxable income $455,000
B)Deduction $30,000; taxable income $470,000
C)Deduction $0; taxable income $500,000
D)Deduction $45,000; taxable income $255,000
Q4) The Schedule M-3 reconciliation requires less detailed information than the M-1 reconciliation.
A)True
B)False
Page 13
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Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) Glover,Inc.had $350,000 of taxable income,all of which was personal holding company income.The corporation paid a dividend of $350,000 in November.The corporation will owe a personal holding company tax for the year.
A)True
B)False
Q2) Which of the following statements regarding corporate controlled groups is false?
A)The progressive corporate tax rate structure is applied to the aggregate taxable income of the members of a controlled corporate group.
B)Each member of a controlled corporate group is permitted to accumulate $250,000 of earnings without imposition of the accumulated earnings tax.
C)The tax law identifies two types of controlled corporate groups: brother-sister controlled groups and parent-subsidiary controlled groups.
D)Brother-sister controlled groups are not eligible to file consolidated income tax returns.
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Chapter 13: Jurisdictional Issues in Business Taxation
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Q1) Which of the following statements concerning the taxation of a U.S.multinational corporation is true?
A)A U.S.corporation is taxed by the United States only on its U.S.source income.
B)The foreign tax credit ensures that a U.S.corporation will never pay taxes at a higher rate than the one imposed by the U.S.tax law.
C)Cross-crediting allows a U.S.corporation to maximize its foreign tax credit.
D)The foreign tax credit allows a U.S.corporation to defer taxation of its foreign source income until the earnings are repatriated.
Q2) Lincoln Corporation,which has a 34% marginal tax rate,owns 50% of the stock of a controlled foreign corporation (CFC).At the beginning of the year,Lincoln's basis in its CFC stock was $100,000.The CFC's current-year income was $1 million,$600,000 of which was subpart F income.The CFC paid no foreign income tax and distributed no dividends.How much current taxable income must Lincoln report as a result of its ownership of the CFC?
A)$100,000
B)$600,000
C)$300,000
D)$0
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Page 15
Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Miss Blixen's regular income tax is $77,390,and her tentative minimum tax is $74,100.Consequently,Miss Blixen's alternative minimum tax (AMT)is zero.
A)True
B)False
Q2) Mr.Marshall was employed by IMP Inc.until October,when he accepted a new position with Turine Inc.Mr.Marshall earned $129,000 compensation from IMP and $36,000 compensation from Turine.Which of the following statements is false?
A)Turine must withhold Social Security tax from Mr.Marshall's $36,000 compensation.
B)Turine must withhold Medicare tax from Mr.Marshall's $36,000 compensation.
C)Mr.Marshall is entitled to an income tax credit for excess Social Security tax withheld by his employers this year.
D)None of the above is false.
Q3) In computing taxable income,an individual is allowed to deduct the lesser of itemized deductions or the standard deduction.
A)True
B)False
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Page 16
Chapter 15: Compensation and Retirement Planning
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Q1) Jason,a single individual,is employed by KLD Inc.but doesn't participate in any employer-sponsored retirement plan.Jason's annual contribution to his Roth IRA is deductible.
A)True
B)False
Q2) Wages paid by an employer to an employee who is the employer's child under age 18 are not subject to federal FICA and unemployment taxes.
A)True
B)False
Q3) The 10% penalty imposed on premature withdrawals from qualified retirement plans is intended to discourage participants from withdrawing funds before retirement.
A)True
B)False
Q4) Employees typically recognize compensation income in the year in which they are granted stock options.
A)True
B)False
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17
Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) Revenue generated by the unearned income Medicare contribution tax is earmarked for the Medicare trust fund.
A)True B)False
Q2) The tax consequences of a business activity are generally the same as the tax consequences of an investment activity.
A)True B)False
Q3) Beverly earned a $75,000 salary and recognized a $7,200 loss on the sale of corporate stock this year.Compute her AGI in each of the following independent cases. a.Beverly had no other capital transactions this year.
b.Beverly recognized a $13,500 capital gain on the sale of mutual fund shares.
c.Beverly received a $9,500 capital gain distribution from a mutual fund and had a $3,200 capital loss carryforward from a previous year.
Q4) Unrecaptured Section 1250 gain is taxed at a maximum rate of 28%.
A)True B)False
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Chapter 17: Tax Consequences of Personal Activities
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Q1) Sue,a single taxpayer,purchased a principal residence in 2001 for $415,000.In 2005,she paid $18,000 to add a sunroom.This year,Sue sold the residence for $686,000.Her selling expenses were $5,000.How much gain must Sue recognize on the sale?
A)$0
B)$3,000
C)$16,000
D)$25,000
Q2) Which of the following is excluded from gross income?
A)$50,000 slot machine winnings
B)$13,900 value of Hawaiian vacation won on a game show
C)$85,000 Pulitzer prize for journalism
D)None of the above is excluded.
Q3) Which of the following tax payments is allowed as an itemized income tax deduction?
A)Federal gift tax
B)Payroll tax on wages paid to a housekeeper
C)Social Security tax withheld from salary
D)Local property tax on personal automobile
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Chapter 18: The Tax Compliance Process
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Q1) Mr.and Mrs.Nestor were assessed a $51,240 income tax deficiency.Which of the following statements is false?
A)If the Nestors do not have cash on hand to pay the deficiency,the IRS can't force them to sell assets to raise the cash.
B)If the Nestors do not have sufficient assets to pay the deficiency,the IRS may allow them to pay it off over time under an installment plan.
C)If the Nestors do not have sufficient assets to pay the deficiency,the IRS may negotiate an offer in compromise for a lesser payment.
D)Both if the Nestors do not have cash on hand to pay the deficiency,the IRS can't force them to sell assets to raise the cash and if the Nestors do not have sufficient assets to pay the deficiency,the IRS may negotiate an offer in compromise for a lesser payment are false.
Q2) Which type of audit can be handled entirely by telephone or through the mail?
A)Correspondence examination
B)Office examination
C)Field examination
D)All of the above
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