Taxation of Investments Test Preparation
Course Introduction
Taxation of Investments explores the principles and practices involved in the taxation of various investment vehicles, including stocks, bonds, mutual funds, and real estate. The course examines the effects of federal and state tax laws on investment strategies, focusing on topics such as capital gains and losses, tax-deferred and tax-exempt investments, wash sale rules, and the taxation of dividends and interest income. Students will analyze real-world scenarios to understand how taxation impacts portfolio management and personal financial planning, recognizing planning opportunities and compliance responsibilities. The course is designed for students interested in accounting, finance, or pursuing professional careers requiring a solid understanding of investment taxation.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 2019 22nd Edition by Sally
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18 Chapters
1798 Verified Questions
1798 Flashcards
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Page 2
Jones
Chapter 1: Taxes and Taxing Jurisdictions
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90 Verified Questions
90 Flashcards
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Sample Questions
Q1) A tax is a payment to support the cost of government.
A)True
B)False
Answer: True
Q2) A sales tax is an example of an activity-based tax.
A)True
B)False
Answer: False
Q3) A revenue ruling is an example of:
A) Judicial authority
B) Administrative authority
C) Legislative authority
D) Editorial authority
Answer: B
Q4) Which of the following statements about the Internal Revenue Code is false?
A) The Internal Revenue Code has not been amended since 1986.
B) The Internal Revenue Code is part of federal statutory law.
C) The Internal Revenue Code consists of numerically organized sections.
D) Only Congress has the authority to amend the Internal Revenue Code.
Answer: A
Page 3
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Chapter 2: Policy Standards for a Good Tax
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85 Flashcards
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Sample Questions
Q1) Supply-side economic theory holds that people who benefit from a tax rate reduction will spend their tax windfall on consumption goods.
A)True
B)False
Answer: False
Q2) If State H increases its sales tax rate by 1%, its sales tax revenue must also increase by 1%.
A)True
B)False
Answer: False
Q3) Tax systems with regressive rate structures result in a proportionally heavier tax burden on persons with smaller tax bases.
A)True
B)False
Answer: True
Q4) The U.S. individual income tax has always used a progressive rate structure. A)True
B)False Answer: True
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Chapter 3: Taxes as Transaction Costs
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82 Verified Questions
82 Flashcards
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Sample Questions
Q1) Rarke Company must choose between two alternate transactions. Transaction 1 requires a $20,000 nondeductible cash outlay, while transaction 2 requires a $25,000 deductible cash outlay. Determine the marginal tax rate at which the after-tax costs of the two transactions are equal.
A) 15%
B) 20%
C) 25%
D) 30%
Answer: B
Q2) Related party transactions occur in a public market.
A)True
B)False
Answer: False
Q3) The IRS scrutinizes related party transactions more carefully than transactions occurring in a public market.
A)True
B)False
Answer: True
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5
Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) Hubern Inc. is planning a transaction that will generate $275,000 taxable income and cash inflow. The transaction is structured so that Hubern will receive the cash and report the income this year (year 0). Use Appendix A of your textbook provided to Compute the increase in the NPV of the transaction if it can be restructured so that Hubern will receive the cash this year, but report the income one year later (year 1). Hubern's marginal tax rate is 21%, and it uses a 9% discount rate to compute NPV.
A) $6,276
B) $17,938
C) $4,793
D) None of the above
Q2) The time period variable is based on the time value of money.
A)True
B)False
Q3) The tax character of an item of income can change when Congress amends the tax law.
A)True
B)False
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Chapter 5: Tax Research
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82 Flashcards
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Sample Questions
Q1) The U.S. Supreme Court:
A) Typically hears hundreds of tax cases each year.
B) May deny certiorari for a tax case because the court believes that the case involves a significant principle of law.
C) May grant certiorari for a tax case because two or more appellate courts have rendered conflicting opinions on the proper resolution of a tax issue.
D) Does not hear cases on tax issues.
Q2) Treasury regulations are considered statutory authority.
A)True
B)False
Q3) Secondary authorities organize information about primary authorities in a manner that facilitates tax research.
A)True
B)False
Q4) Based on the citation Rev. Rul. 89-157, 1989-1 C.B. 221:
A) This revenue ruling was issued in 1989.
B) This revenue ruling is no longer valid.
C) The abbreviation C.B. stands for Comprehensive Bulletin.
D) This revenue ruling appears on page 157.
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Chapter 6: Taxable Income from Business Operations
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115 Verified Questions
115 Flashcards
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Sample Questions
Q1) Which of the following methods of accounting is never permissible for computing taxable income?
A) Cash receipts and disbursements method
B) Accrual method
C) Hybrid method that combines the cash and accrual methods
D) All of the above are permissible methods of accounting.
Q2) Slumar, an accrual basis, calendar year corporation, reported $7,289,200 net income before tax on its financial statement prepared in accordance with GAAP. The corporate records reveal the following information.
The allowance for bad debts on January 1 was $104,700. Write-offs for the year totaled $113,228, and the addition to the allowance for the year was $105,000.
Slumar incurred $22,000 of entertainment costs and $32,000 of business meals.
At its December 16 meeting, Slumar's board of directors authorized a $100,000 salary bonus for the corporation's CEO. Slumar paid the bonus to the CEO on January 4. The CEO owns 62% of Slumar's outstanding stock.
Slumar was incorporated last year. On its first tax return, it reported a $334,712 net operating loss.
Compute Slumar's taxable income.
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Page 8
Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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115 Verified Questions
115 Flashcards
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Sample Questions
Q1) 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
Q2) Which of the following statements concerning MACRS depreciation is true?
A) MACRS depreciation for the year in which an asset is placed in service or sold is based on the number of days the asset was used in the year.
B) MACRS depreciation for buildings is not accelerated but is computed using the straight-line method.
C) The recovery period under MACRS is based on the estimated useful life of the particular asset under consideration.
D) Salvage value is taken into account in computing MACRS depreciation.
Q3) Which of the following statements about MACRS is false?
A) Depreciable assets are assumed to have no residual or salvage value.
B) Every depreciable asset is assigned to one of ten recovery periods.
C) Allowable depreciation methods are based on the assets assigned recovery period.
D) None of the above is false.
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Chapter 8: Property Dispositions
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122 Flashcards
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Sample Questions
Q1) Michael sold machinery used in his business for $50,000. He purchased the equipment three years ago for $55,000 and deducted $22,800 MACRS depreciation through the date of sale. Compute and characterize Michael's gain on sale.
A) $17,800 Section 1231 gain
B) $22,800 ordinary gain and $45,000 Section 1231 loss
C) $17,800 ordinary gain
D) $17,800 capital gain
Q2) Mrs Lex realized a $78,400 gain on sale of investment land to S&T, which issued a 10-year note in full payment. Mrs Lex must recognize the gain in the year of sale unless she elects to use the installment sale method to recognize gain over the term of the note.
A)True
B)False
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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105 Verified Questions
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Sample Questions
Q1) Nagin Inc. transferred an old asset in exchange for a new asset worth $84,000 and $6,000 cash. The old asset and new asset were like-kind properties. Which of the following statements is true?
A) If Nagin's basis in the old asset was $95,000, Nagin can recognize a $5,000 loss.
B) If Nagin's basis in the old asset was $85,000, Nagin must recognize a $6,000 gain.
C) If Nagin's basis in the old asset was $79,200, Nagin must recognize a $6,000 gain.
D) None of the above is true.
Q2) Determine Loonis and Rhea's tax basis in their LooNR stock and LooNR's aggregate tax basis in the transferred assets.
A) Loonis' basis is $444,000; Rhea's basis is $75,000; LooNR's basis is $1 million.
B) Loonis' basis is $444,000; Rhea's basis is $180,000; LooNR's basis is $1 million.
C) Loonis' basis is $444,000; Rhea's basis is $180,000; LooNR's basis is $624,000.
D) None of the above
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Chapter 10: Sole Proprietorships
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98 Flashcards
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Sample Questions
Q1) Perry is a partner in a calendar year partnership. His Schedule K-1 for the current tax year showed the following:
Ordinary business loss \(\quad\)\(\quad\)\(\quad\)\(\quad\)$ (20,000 )
Short-term capital gain \(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)2,100
Dividend income
\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)1,600
Cash distribution \(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)5,800
Perry's tax basis in his partnership interest at the beginning of the year was $15,400. How much of the ordinary loss may he deduct on his Form 1040? Assume the excess business loss limitation does not apply.
A) $11,700
B) $14,000
C) $10,200
D) $13,300
Q2) Businesses are required by law to withhold federal income tax from the compensation paid to their employees.
A)True
B)False
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Page 12
Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) The dividends-received deduction is equal to 65% of any dividends-received by a corporate taxpayer.
A)True B)False
Q2) After 2017, a 1.4% excise tax applies to the net investment income of all colleges and universities.
A)True B)False
Q3) Eagle, Inc. made a contribution to the Boy Scouts of $25,000 during its current tax year. The corporation's taxable income before any charitable contribution deduction was $200,000. The corporation has a current charitable contribution deduction of $25,000.
A)True B)False
Q4) Angel Corporation's current-year regular tax liability is $40,000. Angel is eligible for a general business credit of $45,000. The corporation will receive a $5,000 refund of federal income tax.
A)True B)False
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Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) If a business is formed as a regular corporation, the income may be subject to double taxation.
A)True
B)False
Q2) Sunny Daze, Inc., a publicly held company, has $9,000,000 of retained earnings and no financial justification for retaining the earnings. Therefore, it must calculate and pay an accumulated earnings tax on its annual corporate tax return.
A)True
B)False
Q3) A family partnership can shift taxable income to younger family members only if these family members own a partnership interest.
A)True
B)False
Q4) Following the Tax Cuts and Jobs Act of 2017, it is no longer possible to use a corporation as a tax shelter.
A)True
B)False
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Chapter 13: Jurisdictional Issues in Business Taxation
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110 Flashcards
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Sample Questions
Q1) Which of the following statements regarding controlled foreign corporations is true?
A) U.S. shareholders are taxable on any income earned by a controlled foreign corporation.
B) U.S. shareholders are never taxable on income earned by a controlled foreign corporation until such income is distributed to the shareholders.
C) U.S. shareholders of a controlled foreign corporation can increase their basis by the amount of any constructive distributions from the corporation.
D) Controlled foreign corporations are taxable in the United States on their worldwide income.
Q2) 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) $420,000
B) $320,250
C) $680,000
D) $518,500
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15
Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Mr and Mrs Reece couldn't complete their 2018 Form 1040 before April 15, 2019. They estimate that they will have a $700 balance of tax due with the return. Which of the following statement is true?
A) If the Reeces fail to file their return by April 15, they may opt to request an extension but still will owe penalties to the IRS.
B) The Reeces can file an extension request by April 15 to extend the tax payment and filing date for six months without penalty.
C) The Reeces can file an extension request by April 15 to extend the filing date for six months without penalty. They must pay the $700 estimated balance of tax due with the extension request.
D) None of the above is true.
Q2) Mr and Mrs Eller's AGI last year was $287,300, and their total tax was $70,268. The couple's safe-harbor estimate of current year tax is $77,295.
A)True
B)False
Q3) Adjusted gross income equals total income less itemized deductions.
A)True
B)False
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Page 16
Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) Mr Hazel, the principal executive officer of a publicly held corporation, received $2.5 million compensation this year. The compensation consisted of an $800,000 base salary and a $1.7 million year-end bonus for outstanding performance. The corporation is allowed to deduct the entire amount of Mr Hazel's compensation.
A)True
B)False
Q2) Six years ago, Linus Corporation granted Pauline a nonqualified option to purchase 5,000 shares of Linus stock for $13 per share. On date of grant, the market price was $11 per share. Last year, Pauline exercised the option when the market price was $47 per share. This year, she sold the stock for $40 per share. Compute Pauline's gain or loss recognized on sale.
A) $135,000 gain
B) $10,000 loss
C) $35,000 loss
D) No gain or loss on sale
Q3) An independent contractor is not entitled to the same fringe benefits as an employee.
A)True
B)False
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Page 17
Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) Mr Carp, a single taxpayer, recognized a $44,000 long-term capital gain, a $12,000 short-term capital gain, and a $10,000 long-term capital loss. Compute Mr Carp's 2018 income and Medicare contribution tax if his taxable income before consideration of his capital transactions is $465,000, none of which is investment income.
Q2) The federal taxable estate of a decedent can exceed the value of the probate estate.
A)True
B)False
Q3) Lindsey owns and actively manages an apartment complex. This year, the complex generated a $40,300 net loss. If Lindsey's AGI before considering this loss is $118,200 and she owns no other passive activities, how much of the loss is deductible this year?
A) $0
B) $9,100
C) $25,000
D) None of the above
Q4) Investment expenses are an itemized deduction.
A)True
B)False
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Page 18
Chapter 17: Tax Consequences of Personal Activities
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Sample Questions
Q1) For purposes of the child credit, a child of divorced parents is considered a dependent of the custodial parent unless that parent agrees to allow the noncustodial parent to claim the child as a dependent.
A)True
B)False
Q2) Polly Nolan received the following items this year.
Interest on New York City School bonds \(\quad\)\(\quad\)\(\quad\) $ 1,600
Gift from grandparents
\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)
\(\quad\)$ 5,000
Jackpot from state lottery
\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)
$ 50,000
Gambling winnings
\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\) \(\quad\)\(\quad\) $ 3,000
Compute Polly's gross income.
A) $59,600
B) $58,000
C) $53,000
D) $50,000
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Chapter 18: The Tax Compliance Process
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Sample Questions
Q1) The revenue agent who audited Mr Silver's 2015 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 2015. 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.
Q2) Macy filed her 2017 tax return on its extended due date of October 17, 2018. The IRS has until December 31, 2020, to audit this return.
A)True
B)False
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Page 20