ACCT 3151 Taxation

1. ThepropertytaxonarenthouseownedbyMr.Janeyincreased by$1,200thisyear.Mr.Janeyincreasedthemonthlyrentchargedtohistenant,Ms.Lacey,by$45.Whobearstheincidence ofthepropertytaxincrease?

A.Mr. Janey

B. Ms.Lacey

C. BothMr.JaneyandMs.Lacey

D.Neither Mr.JaneynorMs.Lacey

2.Whichofthefollowing statementsregardingtaxsystemsisfalse?

A.Asinglepercentagethatappliestotheentiretaxbaseisdescribedasaflatrate.

B. When designing a tax,governments try to identify tax bases that tax payers can easily avoid or conceal.

 C.A tax base is an item,occurrence,transaction,oractivitywithrespecttowhichataxislevied.

D.Withregardtotaxsystems,thetermrevenuereferstothetotaltaxcollectedbythegovernment.

3.ThecityofSpringvaleimposesanetincometaxonbusinesses operatingwithinitsjurisdiction.Thetaxequals

1%ofincomeupto$100,000 and1.5%ofincomeinexcessof$100,000.TheSpringvaleBarandGrillgenerated

$782,000netincomethisyear.Computeitscityincometax.A.$10,230

B. $11,230

C. $11,730

D.Noneoftheabove

4. Whichofthefollowingstatementsregardingthepoliticalprocessofcreatingtaxlawisfalse? A. Thepoliticalprocesscontributestothedynamicnatureofthetaxlaw.

B. Specialinterestgroupshavelittleeffectonthetaxlegislativeprocess.

C. Whentaxpayersdeviceanewtacticforreducing theirtaxburdens,governmentsrespondbyenactinganewruletorenderthetacticineffective.

D.Changesinpolitical philosophyoftenreflectshiftsinthepublicattitudeabouttheproperroleoftaxesin society.

5.Thepersonwhopaysataxdirectly tothegovernmentalwaysbearstheeconomicincidenceofthetax.

(TRUE/FALSE)

6.Lastyear,governmentGlevieda35%taxonindividualincome,andMr.Slatepaid$35,000taxonhis

$100,000income.Thisyear,thegovernmentincreasedthetaxrateto40%.Whichofthefollowingstatementsis

false?

A.Basedonastaticforecast,governmentGshouldcollect$5,000additional taxfromMr.Slatethisyear.

B. IfMr.Slatetookasecondjobtomaintain hisafter-taxdisposableincome,hisbehaviorillustratesasubstitutioneffectoftherateincrease.

C. IfMr.Slatetookasecondjobtomaintain hisafter-taxdisposableincome,governmentGshouldcollectmore than $5,000additionaltaxfromhimthisyear.

D.IfMr.Slatesoldanincome-generatinginvestmentandusedthemoneyforpersonalconsumption,hisbehavior illustratesasubstitutioneffectoftherateincrease.

7.JurisdictionMimposesanindividual incometaxbasedonthefollowingschedule.

Whichofthefollowingstatementsistrue?

A.Theschedule providesnoinformationastowhetherJurisdictionM'staxishorizontallyequitable. B. JurisdictionM'staxisverticallyequitable.

C. JurisdictionM'staxisverticallyequitableonlyforindividualswith$50,000orlesstaxableincome.

D. BothA.andB.aretrue.

8.Whichofthefollowingstatementsaboutaregressive taxratestructureisfalse?

A.Aregressiveratestructurecannotresultinverticalequity. B. Regressiveratesdecreaseasthetaxbaseincreases.

C.Aregressive ratestructureplacesaproportionallyheaviertaxburdenontaxpayerswithsmallertaxbasesthanpersons withgreatertaxbases.

D.Noneoftheaboveisfalse.

9.VervetCountyleviesarealproperty taxbasedonthefollowingschedule.

Whichofthefollowingstatementsisfalse?

A.IfMr.Clemownsrealproperty valuedat$112,500,hisaveragetaxrateis3%.

B. IfMs.Barkerownsrealpropertyvaluedat$455,650,heraveragetaxrateis2.1%. C. IfMs.Lumleyownsrealpropertyvaluedat$750,000,hermarginaltaxrateis1%.D. Noneoftheaboveisfalse.

10.ThecityofBernerecently enacteda10%taxonthepriceofasubwayticket.Consequently,Mrs.Lanenow walkstoworkinstead oftakingthesubway.Herbehaviorillustratesthesubstitutioneffectofataxincrease. (TRUE/FALSE)

11.Thepresentvalueofadollaravailable inafutureperiodincreases asthediscountrateincreases. (TRUE/FALSE)

12.Thebefore-taxcashflowandafter-tax cashflowfromanontaxable transactionareequal. (TRUE/FALSE)

13.Abusiness strategythatreducesthetaxcostofatransactionalwaysincreasestheNPVofthetransaction. (TRUE/FALSE)

14.Thearm'slengthtransactionpresumption

A. Assumesthateachpartyisdealinginitsowneconomicself-interest. B. Cannotbesatisfiedinaprivatemarkettransaction.

C. Requiresdirectnegotiationbetweenpartiestoensureanarm'slengthprice.

D.Appliestobothrelatedpartyandunrelated partytransactions.

15.Whichofthefollowingstatementaboutprivatemarkettransactionsisfalse?

A.Bothparties haveflexibility indeterminingthelegalandfinancial characteristicsofthetransaction.

B. Thepartiesnegotiatedirectlywitheachother.

C. Thepartiesaredealingatarm'slength.

D. Thepartiesmustengageinunilateralinsteadofbilateraltaxplanning.

16.HilexInc.liquidatesitsinvestmentinGeneralElectriccorporatebondsandreinveststheproceedsinCityof

Miamimunicipalbonds.Thistaxplanningstrategymaybetakingadvantageofthe:

A.Character variable

B. Entityvariable

C. Timeperiodvariable

D.Jurisdictionvariable

17.Whichofthefollowingstatementsistrue?

A. MaryGillyowns100%ofthestockofGillyInc.BothMaryandGillyInc.aretaxpayers underfederallaw.

B. Thesameratescheduleappliestobothindividualandcorporatetaxpayers.

C. Thetaxprovisionsgoverningthecomputationofindividualbusinessincomeareseparateanddistinctfromthe taxprovisionsgoverningthecomputationofcorporatebusinessincome.

D.StatementsA.andC.aretrue.

18.Mrs.Bern'smarginal taxrateis33%,andhergrandsonJeff'smarginaltaxrateis10%.Whichofthefollowing statementisfalse?

A.Thefamilycouldsave23centsoftaxforeverydollarofdeduction shiftedfromJefftoMrs.Bern.B. Thefamilycouldsave23centsoftaxforeverydollarofincomeshifted fromMrs.BerntoJeff.

C. AnyincomeshiftfromMrs.BerntoJeffisconstrainedbytheassignmentofincomedoctrine.

D. Noneoftheaboveisfalse.

19.Whichofthefollowingstatementsabouttaxdeferralistrue?

A.Thevalueoftaxdeferral increasesasthetaxpayer'sdiscountrateforcomputingNPVdecreases.

B. Taxdeferralisnotaneffectiveplanningstrategyifthetaxpayer'smarginaltaxrateisstableovertime.

C. Thegreaterthelengthoftimethatthepaymentofataxisdeferred, thelessthetaxcostsinNPVterms.

D.BothA.andC.aretrue.

20.Whichofthefollowingstatementsaboutordinaryincomeandcapitalgainisfalse?

A.Everyitemofincome ischaracterizedaseitherordinaryincomeorcapitalgainforfederaltaxpurposes.

B. Ordinaryincomeistaxedattheregularindividualorcorporatetaxrates.

C. Individualsandcorporationspaytaxontheircapitalgainsatapreferential rate.

D.Noneoftheaboveisfalse.

21.TaxplanningstrategiestoenhanceNPVmustreflectallfourtaxplanning maxims. (TRUE/FALSE)

22.Whenperformingsteponeofthetaxresearchprocess:

A. Theresearchergenerallycanassumethattheclient'sinitialsummaryofthetransactionisfactuallyaccurateandcomplete.

B. Theresearchermusttakeintoaccounttheleveloftheclient'staxknowledge. C. Theclient'smotivationinundertakingthetransactionisgenerallyirrelevant.

D.Theresearchershouldpresumethattheclienthassomeknowledgeofthetaxlaw.

23.Whichofthefollowing isnotoneofthethreesourcesofauthoritythatcomprisethefederaltaxlaw?A.Statutory authority

B. Secondaryauthority

C. Administrativeauthority

D. Judicialauthority

24. Whichofthefollowingisprimaryauthorityonwhichtobaseresearchconclusions? A.Thistextbook

B. Aneditorialexplanationinacommercialtaxservice

C.ATreasuryregulation

D.Atreatisewrittenbyataxattorney andpublishedinalegaljournal

25.Whichofthefollowing isnotapropercitation toaTreasury regulation?

A.Reg.Sec.1.61-1(a)

B. Reg.1.61-1(a)C. Reg.§1.611(a)

D. Treasury Regulation61-1(a)

26. Whichofthefollowingprimaryauthoritiesisleastlikelytoprovideadetailed descriptionoffactstowhicha researchercancomparehisorherclient'sfactpattern?

A. Internal RevenueCodesection

B. Treasuryregulation

C. Revenueruling

D.TaxCourtdecision

27.Acorporationcan'thaveanincreaseindeferredtaxassetsandanincreaseindeferredtaxliabilitiesinthesame year. (TRUE/FALSE)

28.Ifanaccrualbasistaxpayerprepaysinterestexpense,thepaymentresultsinanunfavorabletemporarybook/

taxdifference (TRUE/FALSE)

29.Whichofthefollowing businessexpensesalwaysresultsinadifference betweentaxableincomeandbookincome?

A.Rentexpense

B. Interestexpense

C. Cliententertainment

D.Salaryexpense

30.SouthlawnInc.'staxableincomeiscomputedasfollows.

Usinga34%rate,compute Southlawn'staxexpenseperbooksandtaxpayable.

A. Taxexpenseperbooks$643,824;taxpayable$579,564

B. Taxexpenseperbooks$579,564;taxpayable$643,824

C. Taxexpenseperbooks$817,904;taxpayable$579,564

D.Noneoftheabove

31. GH&Fisacalendar year,accrualbasistaxpayer.InOctober2012,GH&Freceivedan$18,000cashpayment fromatenantwholeasesspaceinacommercial officebuildingthatGH&Fowns.Thepaymentwasrentforthe

18-monthperiodbeginningonNovember1,2012.Asaresultofthepayment, GH&Fshouldreport: A.$2,000bookincomeandtaxableincome

B. $2,000bookincomeand$18,000taxableincome

C. $18,000bookincomeandtaxableincome

D.Noneoftheabove

32. Ifanaccrualbasistaxpayerreceivesaprepayment ofrentincome,thereceiptresultsinanunfavorable temporarybook/taxdifference. (TRUE/FALSE)

33. This year, GarfieldInc.generated a$25,000netoperating loss.Whichofthefollowingstatementsisfalse? A.IfGarfieldcancarrytheentireNOLbacktodeductagainstprioryeartaxableincome,theNOLwillhaveno deferredtaxconsequences.

B. IfGarfieldcan'tuseanyoftheNOLasacarrybackdeduction,theNOLwillresultinadeferred taxliability.C. GarfieldcanelecttogiveupthecarrybackoftheNOL.

D.IfGarfieldcan'tuseanyoftheNOLasacarryback deduction,itcancarrytheNOLforwardfor20years.

34.PooleCompanymadea$100,000 cashexpenditurethisyear.Whichofthefollowingstatementsisfalse?

A.Poolemustcapitalize theexpenditureifitcreatesanewassetthatthecompany canuseforthenextfouryears. B. Poolemustcapitalizetheexpenditureifitextendstheestimatedusefullifeofanexistingassetbythreeyears. C. Poolemustcapitalizetheexpenditureifitresultsinalong-term economicbenefittothecompany.

D. Noneoftheaboveisfalse.

35.KassimCompanypurchasedanassetbypaying$35,000cashandgivingthesellerits3-yearnotefor

$240,000.Whichofthefollowingstatementsistrue?

A. Kassim'sbook basis and tax basis in the asset is $275,000.

B. Kassim'sbookbasis is$275,000,butitstaxbasisis$35,000. C. Kassim'sbook basis and tax basis in the asset is $35,000.

D.IfKassimisacashbasistaxpayer, itsinitialtaxbasisintheassetiszero.

36.AbasicpremiseoffederalincometaxlawisthatanexpenseisdeductibleunlesstheInternalRevenueCodespecificallyprohibitsthededuction.

37.CosmoInc.paid$15,000 plus$825salestaxplusa$200delivery chargeforanewbusiness asset.Cosmo'staxbasisintheassetis$15,200, anditcandeductthesalestax.(TRUE/FALSE)

38. CosmoInc.purchasedanassetcosting$67,500bypaying$13,500cashatdateofpurchaseandgivingthesellera5-yearinterest-bearingnoteforthe$54,000balance.Cosmo'staxbasisintheassetis$13,500. (TRUE/FALSE)

39.ColbyCompany performedprofessionalservicesforM&EInc.Inexchangefortheservices,M&EgaveColbya12-monthleaseoncommercialofficespace.M&Ecouldhavecharged$4,350monthlyrentforthespace ontheopenmarket.ComputeColby'staxbasisinthelease.

A.Theleaseisanintangible assetandthereforehasazerobasistoColby.B. TheleasehasazerobasisbecauseColbyobtainedtheleaseatnocost.C. $52,200.

D.Noneoftheabove

40. Broadus.,acalendar yeartaxpayer,purchasedatotalof$128,300 tangiblepersonaltyin2012.Broadus' taxableincomewithoutregardtoaSection179deductionwas$92,600.Whichofthefollowingstatementsis true?

A.Broaduscanelecttoexpenseonly$92,600ofthecostofthepersonalty.

B. Broaduscanelecttoexpensethe$128,300costofthepersonaltybutcandeductonly$92,600oftheexpense. C. Broaduscanelecttoexpenseonly$35,700ofthecostofthepersonalty.

D.Broaduscanelecttoexpensethe$168,300costofthepersonaltybutcandeductonly$35,700oftheexpense.

41.Whichofthefollowingcapitalizedcostisnotamortizablefortaxpurposes?

A. Purchasecostofapartnershipinterest

B. Purchase cost of business goodwill

C. Leaseholdcost

D.Purchase costofapatent

42.PowellInc.wasincorporatedandbeganoperationsonOctober1andadopted acalendaryearfortaxpurposes. Powellpaid$4,200totheattorneywhohandledthecorporateformation.Whichofthefollowingstatementsis true?

A.IfPowellcapitalizedthe$4,200paymentforfinancial statementpurposes,itmustalsocapitalizeitfortaxpurposes.

B. Powellcandeductthe$4,200paymentonitsfirsttaxreturn.

C. Fortaxpurposes,Powellmustcapitalizethe$4,200organizationalcostandamortizeitover15years.D.Noneoftheaboveistrue.

43.LenociInc.paid$310,000 forequipmentthreeyearsago.Thisyear,itsoldtheequipmentfor$200,000. Throughdateofsale,accumulatedbookdepreciationwas$93,840andaccumulatedtaxdepreciationwas

$147,327.Whichofthefollowingstatementsistrue?

A.Thesaleresultsina$53,487favorabletemporarybook/taxdifference.

B. Thesaleresultsina$53,487unfavorabletemporarybook/taxdifference. C. Thesaleresultsina$53,487unfavorablepermanentbook/taxdifference. D.Noneoftheaboveistrue.

44.O&V soldanassetwitha$78,300 adjustedtaxbasisfor$100,000.Thepurchaserpaid$30,000incashand assumedO&V's $70,000mortgageontheasset.ComputeO&V'snetcashflowfromthesaleassuming a35%taxrate.

A. $22,405

B. $13,095

C. $14,105

D.Noneoftheabove

45.Thisyear,MsLucassoldinvestmentlandfor$125,000cashplusthepurchaser'sassumptionofa$50,000mortgageontheland.Ms.Lucas'taxbasisinthelandwas$93,000.Ifanyrecognizedgainistaxedat15percent, computetheafter-taxcashflowfromthesale.

A.$62,300

B. $69,700

C. $112,700

D.$162,700

46.Mr.Quicksoldmarketablesecuritieswitha$112,900 taxbasistohis100%ownedcorporationfor$95,000 cash.Whichofthefollowingstatementsistrue?

A.IfMr.QuickcanofferevidencethattheFMVofthesecuritiesis$95,000,hecanrecognizehis$17,900

realizedloss.

B. IfMr.Quickandhiscorporationnegotiatedthetermsofthesaleatarm'slength,Mr.Quickcanrecognizehis

$17,900realized loss.

C. Thecorporation'staxbasisinthesecuritiesis$112,900.

D.Noneoftheaboveistrue.

47.Whichofthefollowing isacapitalasset?A.Supplies usedinabusiness

B. Business inventory

C. Landusedinabusiness

D.Noneoftheabove

48. RizziCorporationsoldacapital assetwitha$692,000 bookandtaxbasisfor$650,000cash.ThiswasRizzi's onlyassetsaleduringtheyear.Thesaleresultsin:

A.$42,000unfavorablepermanentbook/taxdifference B. $42,000unfavorabletemporarybook/taxdifference C. $42,000favorablepermanentbook/taxdifference

D.Nobook/tax difference

49. Mr.and Mrs.Sykes operate a very profitablesmallbusiness. Thisyear,theSykesrecognizeda$100,000 gain onsaleofatradenametheyhadcreatedandcopyrightedforuseintheirbusinessin1994.Whichofthefollowing statementsistrue?

A. The$100,000gainiscapitalgaineligibleforapreferentialtaxrate.

B. The$100,000gainiscapitalgainagainstwhichtheSykescandeductanycapitallossesrecognizedthisyear.C. The$100,000 gainisordinarybusinessincome.

D. Statementsa.andb.aretrue.

50.NorbettInc.generated $15,230,000ordinarytaxableincomeandrealizeda$238,000 netcapitallossonthe saleofmarketablesecuritiesthisyear.Whichofthefollowingstatementsisfalse?

A.Norbett's netincomeperbooksincludesthe$238,000netcapitalloss.

B. Norbett's taxableincomeis$15,230,000.

C. The$238,000netcapitallossisafavorable book/taxdifference.

 D.The$238,000netcapitallossisatemporary book/taxdifference.