Taxation of Investments Pre-Test
Questions
Course Introduction
Taxation of Investments provides a comprehensive overview of the tax principles and regulations that affect investment decisions, planning, and reporting. The course examines the taxation of various investment vehicles, including stocks, bonds, mutual funds, real estate, and derivatives. Topics include capital gains and losses, cost basis determination, tax-deferred and tax-exempt accounts, dividend taxation, wash sale rules, passive activity and at-risk limitations, and tax implications of international investments. Emphasis is placed on strategies for minimizing tax liability and understanding compliance requirements as they pertain to both individual and institutional investors. Through practical examples and case studies, students will gain proficiency in applying tax concepts to real-world investment scenarios.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 2016 19th Edition by Sally Jones
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Page 2
Chapter 1: Taxes and Taxing Jurisdictions
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Sample Questions
Q1) Which of the following statements regarding the political process of creating tax law is false?
A) The political process contributes to the dynamic nature of the tax law.
B) Special interest groups have little effect on the tax legislative process.
C) When taxpayers device a new tactic for reducing their tax burdens, governments respond by enacting a new rule to render the tactic ineffective.
D) Changes in political philosophy often reflect shifts in the public attitude about the proper role of taxes in society.
Answer: B
Q2) 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) A sales tax is an example of an activity-based tax.
A)True
B)False
Answer: False
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Chapter 2: Policy Standards for a Good Tax
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Q1) The city of Berne recently enacted a 10% tax on the price of a subway ticket. Consequently, Mrs. Lane now walks to work instead of taking the subway. Her behavior illustrates the substitution effect of a tax increase.
A)True
B)False
Answer: True
Q2) Which of the following statements about the income effect of an income tax rate increase is true?
A) The income effect is theoretically stronger for low-income taxpayers than for high-income taxpayers.
B) The income effect is theoretically stronger for a family's secondary wage earner than for the family's primary wage earner.
C) The income effect motivates individuals to find ways to increase their before-tax income.
D) Both A. and C. are true.
Answer: D
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Chapter 3: Taxes As Transaction Costs
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Q1) The IRS scrutinizes related party transactions more carefully than transactions occurring in a public market.
A)True
B)False
Answer: True
Q2) An increase in the risk associated with a future stream of cash should result in an increase in the discount rate used in the present value calculation.
A)True
B)False
Answer: True
Q3) When the IRS audits a tax return, it is most likely to scrutinize the tax consequences of a/an:
A) Related party transaction
B) Private market transaction
C) Public market transaction
D) Arm's length transaction
Answer: A
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Page 5
Chapter 4: Maxims of Income Tax Planning
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Q1) 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
Q2) 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
Q3) Mrs. Day structures a transaction to convert income from ordinary income to capital gain. This tax planning strategy may be taking advantage of the:
A) Entity variable
B) Time period variable
C) Jurisdiction variable
D) Character variable
Q4) Opportunity cost refers to the decrease in NPV from a deferral of the receipt of before-tax cash flows.
A)True
B)False
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6
Chapter 5: Tax Research
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Sample Questions
Q1) Which of the following is not a citation to a primary authority?
A) Sec. 1245
B) Lengsfield v. Comm., 50 AFTR 1683 (CA-5, 1957)
C) M-5800 Activities Not Engaged in for Profit - Hobby Losses
D) Rev. Proc. 2002-32, 2002-1C.B. 958
Q2) In circumstances requiring an evaluative judgment, the tax researcher can provide can provide a definitive answer to the research question.
A)True
B)False
Q3) 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
Q4) Tax judicial decisions each have a single, unique citation.
A)True
B)False
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Chapter 6: Taxable Income From Business Operations
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Q1) HHF Corporation received permission from the IRS to change its taxable year from a fiscal year ending August 31 to a calendar year. Consequently, HHF filed a short-period return for the four-month period from September 1 through December 31. The taxable income reported on the return was $56,000. Use the corporate tax rates in Appendix C of the text to compute HHF's tax on this income (to the nearest dollar).
A) $9,000
B) $14,000
C) $16,257
D) $48,770
Q2) Eaton Inc. is a calendar year, cash basis taxpayer. On October 1, 2015, Eaton paid $4,800 to a security firm for night-time and weekend security services for the 24-month period beginning with October. Which of the following is true?
A) As a cash basis taxpayer, Eaton can deduct the $4,800 expense in 2015.
B) Eaton can deduct $600 in 2015, and the remaining $4,200 in 2016.
C) Eaton can deduct $600 in 2015, $2,400 in 2016, and $1,800 in 2017.
D) None of the above is true.
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8
Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) Mr. and Mrs. Carleton founded Carleton Industries in 1993. This year, an independent appraiser placed a $25 million value on Carleton's business; $5 million of the value was attributable to unrecorded goodwill. Which of the following statements is true?
A) Mr. and Mrs. Carleton are allowed to amortize the $5 million value of their business goodwill over 15 years.
B) Mr. and Mrs. Carleton have a zero tax basis in their business goodwill.
C) Mr. and Mrs. Carleton cannot amortize the $5 million value of their business goodwill because it is an intangible asset with an indeterminable life.
D) None of the above is true.
Q2) A firm must capitalize start-up expenditures of a new business in excess of $5,000 but may deduct expansion costs of an existing business.
A)True
B)False
Q3) Repair costs incurred to keep a tangible asset in good working order must be capitalized to the cost of the asset.
A)True
B)False
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Page 9
Chapter 8: Property Dispositions
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Sample Questions
Q1) Several years ago, Nipher paid $70,000 to purchase equipment to use in its business. This year, it sold the equipment for $76,500. Accumulated MACRS depreciation through date of sale was $18,000. Determine the amount and character of Nipher's gain recognized.
A) $24,500 ordinary gain
B) $24,500 Section 1231 gain
C) $18,000 ordinary gain and $6,500 capital gain
D) $18,000 ordinary gain and $6,500 Section 1231 gain
Q2) Princetown Inc. has a $4.82 million basis in 88% of the outstanding stock of Merryvale Corporation. Merryvale manufactures Christmas decorations, cards, and wrapping paper. Princetown's board of directors recently learned that Merryvale is bankrupt. The board voted unanimously to dissolve the corporation and distribute all assets to Merryvale's creditors. What is the tax consequence to Princetown of the board's actions?
A) No loss recognition until Princetown actually disposes of the Merryvale stock.
B) $4.82 million Section 1231 loss.
C) $4.82 million capital loss.
D) $4.82 million ordinary loss.
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Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) On May 13, 2015, a flood destroyed the building in which SDF Inc. manufactured its product. SDF's adjusted tax basis in the building was $984,000. On November 29, 2015, SDF received a $1.2 million reimbursement from its casualty insurance company. In each of the following cases, compute SDF's recognized gain on this involuntary conversion and its initial basis in the replacement property.
a. On June 2, 2016, SDF completed construction of a replacement building for $1.3 million.
b. On February 18, 2018, SDF paid $1.3 million to purchase a replacement building.
c. On August 30, 2017, SDF paid $1.1 million to purchase a replacement building.
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.
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11
Chapter 10: Sole Proprietorships, Partnerships, Llcs, and S Corporations
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Q1) Which of the following statements regarding a sole proprietorship is false?
A) A sole proprietorship is an unincorporated business operated by one individual.
B) Taxable income from a sole proprietorship is reported on Schedule D of the proprietor's individual income tax return.
C) Sole proprietors are entitled to deduct 50 percent of self-employment tax paid.
D) None of the above statements are false.
Q2) Which of the following statements about S corporations is true?
A) An S corporation has unlimited liability.
B) An S corporation is a flow-through entity for federal income tax purposes.
C) S corporations can only have 75 shareholders.
D) S corporations can have several classes of stock.
Q3) The earnings of a C corporation are taxed only at the shareholder level.
A)True
B)False
Q4) Corporations cannot be shareholders in an S corporation.
A)True
B)False
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Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) Which of the following statements regarding Schedule M-3 is false?
A) The IRS developed Schedule M-3 with the goal of increasing transparency between reported net income for financial accounting purposes and reported net income for tax purposes.
B) Schedule M-3 reports the temporary versus permanent characterization of book-tax differences.
C) Part I of Schedule M-3 reconciles worldwide financial statement net income to the financial statement net income of those corporations permitted to be included in the U.S. consolidated tax return group.
D) Schedule M-3 replaces Schedule M-1 for all tax years beginning after December 31, 2004.
Q2) The Schedule M-3 reconciliation requires less detailed information than the M-1 reconciliation.
A)True
B)False
Q3) The corporate alternative minimum tax rate is 26% of AMTI in excess of the AMT exemption.
A)True
B)False
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Page 13
Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) Kyrsten Haas expects her S corporation to generate a profit of $200,000. What is the effective tax rate on the $200,000 if no cash is distributed? Kyrsten's marginal tax rate on ordinary income is 39.6%.
A) 35%
B) 60.8%
C) 44.5%
D) 39.6%
Q2) After-tax cash flow is minimized when a business operates as a passthrough entity rather than a taxable corporation.
A)True
B)False
Q3) Kyrsten Haas expects her S corporation to generate a profit of $200,000. Kyrsten's marginal tax rate on ordinary income is 39.6%. What is Kyrsten's after-tax cash flow from the S corporation if no cash is distributed?
A) $0
B) $(79,200)
C) $120,800
D) $(120,800)
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Chapter 13: Jurisdictional Issues in Business Taxation
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Q1) This year, Sutton Corporation's before-tax income was $2,000,000. It paid $175,000 income tax to Nebraska and $300,000 income tax to Iowa. Compute Sutton's federal income tax.
A) $680,000
B) $518,500
C) $700,000
D) $533,750
Q2) Which of the following entities is not subject to U.S. federal income tax?
A) U.S. corporation conducting 100 percent of its business outside the United States
B) Branch of U.S. corporation operating entirely in Germany
C) French subsidiary of U.S. parent operating entirely in France
D) Dutch corporation operating entirely within the United States
Q3) Multi-state businesses can reduce their overall tax cost to the extent they can shift income from a low-tax state to a high-tax state.
A)True
B)False
Q4) The United States taxes its citizens on their worldwide incomes.
A)True
B)False
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Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) 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.
Q2) The unextended due date for the individual tax return (Form 1040) is the 15<sup>th</sup> day of the third month following the close of the taxable year.
A)True
B)False
Q3) Bill and Afton are married and file a joint tax return. Bill is 67 and Afton is 66, and neither is legally blind. Their standard deduction for 2015 is $15,100.
A)True
B)False
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Page 16
Chapter 15: Compensation and Retirement Planning
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Q1) This year, Haven Corporation granted a nonqualified stock option to Olivia to buy 5,000 shares of Haven stock for $20 for five years. At date of grant, Haven stock was selling on the Nasdaq for $19 per share. For financial statement purposes, Haven recorded $16,500 compensation expense for the estimated value of the option. Five years after Haven granted the option to Olivia, she exercised it on a day when Haven stock was selling for $27 per share.
a. How much income must Olivia recognize in the year of exercise?
b. What is Haven's tax deduction in the year of exercise?
c. What is the effect of the exercise on Haven's book income and deferred taxes?
Q2) Unreimbursed moving expenses are a miscellaneous itemized deduction.
A)True
B)False
Q3) Section 401(k) plans allow employees to contribute a portion of their current wages or salary to a tax-exempt retirement account. However, the contributed portion is still taxable compensation to the employee.
A)True
B)False
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Page 17
Chapter 16: Investment and Personal Financial Planning
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Q1) Lana owns 50 shares of stock qualifying as Section 1244 stock. If she sells the stock to George, he can also treat the stock as Section 1244 stock.
A)True
B)False
Q2) Mr. Forest, a single taxpayer, recognized a $252,000 loss on the sale of Section 1244 stock. What is the character of this loss?
A) $50,000 ordinary and $202,000 capital
B) $100,000 ordinary and $152,000 capital
C) $252,000 capital
D) $252,000 ordinary
Q3) This year, Ms. Kwan recognized a $16,900 net long-term capital loss. Which of the following statements is true?
A) Ms. Kwan has a $16,900 long-term capital loss carryforward into future years.
B) Ms. Kwan has a $16,900 nondeductible loss that she can carry back three years and forward five years.
C) Ms. Kwan can deduct $3,000 of the loss as an itemized deduction.
D) None of the above is true.
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Chapter 17: Tax Consequences of Personal Activities
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Q1) Gary is a successful architect who also sings at weddings. This year, he received $5,400 fees from his singing and spent $6,250 on singing lessons, sheet music, and travel to the weddings. If Gary reports this activity as a hobby for federal tax purposes, which of the following statements is true?
A) Gary is not required to include the $5,400 in gross income.
B) Gary is not allowed to deduct any of his hobby expenses.
C) Gary is allowed to deduct $5,400 as an above-the-line deduction.
D) None of the above is true.
Q2) Which of the following itemized deductions is disallowed in the computation of alternative minimum taxable income (AMTI)?
A) State and local income tax
B) Casualty loss
C) Charitable contribution
D) Gambling loss
Q3) Lori owns a vacation home that she rents out for about three months each year. Her deduction for expenses allocable to the rental periods is limited to her gross rental income.
A)True
B)False
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Page 19
Chapter 18: The Tax Compliance Process
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Q1) A taxpayer who is disputing a deficiency of $50,000 or less may request an informal hearing by the Small Tax Case Division of the Tax Court.
A)True
B)False
Q2) The revenue agent who audited Mr. Silver's 2013 Form 1040 concluded that Mr. Silver deliberately disregarded the tax rules about charitable contributions. Consequently, the agent disallowed $19,320 of Mr. Silver's contribution deduction. Mr. Silver also miscalculated his AMT in spite of his good faith effort to make the difficult calculation. Because of these two errors, the agent assessed a tax deficiency for 2013. Which of the following statements is false?
A) The agent has the authority to impose a negligence penalty in addition to the deficiency.
B) The agent could impose a negligence penalty on the entire deficiency.
C) The agent could impose a negligence penalty on the portion of the deficiency attributable to the disallowed contribution deduction.
D) If the agent imposes a negligence penalty, Mr. Silver has the right to appeal the penalty.
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Page 20