Taxation Assignment
1. The property tax on a rent house owned by Mr. Janey increased by $1,200 this year. Mr. Janey increased the monthly rent charged to his tenant, Ms. Lacey, by $45. Who bears the incidence of the property tax increase?
A. Mr. Janey
B. Ms. Lacey
C. Both Mr. Janey and Ms. Lacey
D. Neither Mr. Janey nor Ms. Lacey
2. Which of the following statements regarding tax systems is false?
A. A single percentage that applies to the entire tax base is described as a flat rate.
B. When designing a tax, governments try to identify tax bases that taxpayers can easily avoid or conceal.
C. A tax base is an item, occurrence, transaction, or activity with respect to which a tax is levied.
D. With regard to tax systems, the term revenue refers to the total tax collected by the government.
3. The city of Springvale imposes a net income tax on businesses operating within its jurisdiction. The tax equals 1% of income up to $100,000 and 1.5% of income in excess of $100,000. The Springvale Bar and Grill generated $782,000 net income this year. Compute its city income tax.
A. $10,230
B. $11,230
C. $11,730
D. None of the above
4. 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.
5. The person who pays a tax directly to the government always bears the economic incidence of the tax.
True False
6. Last year, government G levied a 35% tax on individual income, and Mr. Slate paid $35,000 tax on his $100,000 income. This year, the government increased the tax rate to 40%. Which of the following statements is false?
A. Based on a static forecast, government G should collect $5,000 additional tax from Mr. Slate this year.
B. If Mr. Slate took a second job to maintain his after-tax disposable income, his behavior illustrates a substitution effect of the rate increase.
C. If Mr. Slate took a second job to maintain his after-tax disposable income, government G should collect more than $5,000 additional tax from him this year.
D. If Mr. Slate sold an income-generating investment and used the money for personal consumption, his behavior illustrates a substitution effect of the rate increase.
7. Jurisdiction M imposes an individual income tax based on the following schedule.
Which of the following statements is true?
A. The schedule provides no information as to whether Jurisdiction M's tax is horizontally equitable.
B. Jurisdiction M's tax is vertically equitable.
C. Jurisdiction M's tax is vertically equitable only for individuals with $50,000 or less taxable income.
D. Both A. and B. are true.
8. 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.
9. Vervet County levies a real property tax based on the following schedule.
Which of the following statements is false?
A. If Mr. Clem owns real property valued at $112,500, his average tax rate is 3%.
B. If Ms. Barker owns real property valued at $455,650, her average tax rate is 2.1%.
C. If Ms. Lumley owns real property valued at $750,000, her marginal tax rate is 1%.
D. None of the above is false.
10. 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.
True False
11. The present value of a dollar available in a future period increases as the discount rate increases.
True False
12. The before-tax cash flow and after-tax cash flow from a nontaxable transaction are equal.
True False
13. A business strategy that reduces the tax cost of a transaction always increases the NPV of the transaction.
True False
14. The arm's length transaction presumption
A. Assumes that each party is dealing in its own economic self-interest.
B. Cannot be satisfied in a private market transaction.
C. Requires direct negotiation between parties to ensure an arm's length price.
D. Applies to both related party and unrelated party transactions.
15. Which of the following statement about private market transactions is false?
A. Both parties have flexibility in determining the legal and financial characteristics of the transaction.
B. The parties negotiate directly with each other.
C. The parties are dealing at arm's length.
D. The parties must engage in unilateral instead of bilateral tax planning.
16. Hilex Inc. liquidates its investment in General Electric corporate bonds and reinvests the proceeds in City of Miami municipal bonds. This tax planning strategy may be taking advantage of the:
A. Character variable
B. Entity variable
C. Time period variable
D. Jurisdiction variable
17. Which of the following statements is true?
A. Mary Gilly owns 100% of the stock of Gilly Inc. Both Mary and Gilly Inc. are taxpayers under federal law.
B. The same rate schedule applies to both individual and corporate taxpayers.
C. The tax provisions governing the computation of individual business income are separate and distinct from the tax provisions governing the computation of corporate business income.
D. Statements A. and C. are true.
18. Mrs. Bern's marginal tax rate is 33%, and her grandson Jeff's marginal tax rate is 10%. Which of the following statement is false?
A. The family could save 23 cents of tax for every dollar of deduction shifted from Jeff to Mrs. Bern.
B. The family could save 23 cents of tax for every dollar of income shifted from Mrs. Bern to Jeff.
C. Any income shift from Mrs. Bern to Jeff is constrained by the assignment of income doctrine.
D. None of the above is false.
19. Which of the following statements about tax deferral is true?
A. The value of tax deferral increases as the taxpayer's discount rate for computing NPV decreases.
B. Tax deferral is not an effective planning strategy if the taxpayer's marginal tax rate is stable over time.
C. The greater the length of time that the payment of a tax is deferred, the less the tax costs in NPV terms.
D. Both A. and C. are true.
20. Which of the following statements about ordinary income and capital gain is false?
A. Every item of income is characterized as either ordinary income or capital gain for federal tax purposes.
B. Ordinary income is taxed at the regular individual or corporate tax rates.
C. Individuals and corporations pay tax on their capital gains at a preferential rate.
D. None of the above is false.
21. Tax planning strategies to enhance NPV must reflect all four tax planning maxims.
True False
22. When performing step one of the tax research process:
A. The researcher generally can assume that the client's initial summary of the transaction is factually accurate and complete.
B. The researcher must take into account the level of the client's tax knowledge.
C. The client's motivation in undertaking the transaction is generally irrelevant.
D. The researcher should presume that the client has some knowledge of the tax law.
23. Which of the following is not one of the three sources of authority that comprise the federal tax law?
A. Statutory authority
B. Secondary authority
C. Administrative authority
D. Judicial authority
24. Which of the following is primary authority on which to base research conclusions?
A. This textbook
B. An editorial explanation in a commercial tax service
C. A Treasury regulation
D. A treatise written by a tax attorney and published in a legal journal
25. Which of the following is not a proper citation to a Treasury regulation?
A. Reg. Sec. 1.61-1(a)
B. Reg. 1.61-1(a)
C. Reg. §1.61-1(a)
D. Treasury Regulation 61-1(a)
26. Which of the following primary authorities is least likely to provide a detailed description of facts to which a researcher can compare his or her client's fact pattern?
A. Internal Revenue Code section
B. Treasury regulation
C. Revenue ruling
D. Tax Court decision
27. A corporation can't have an increase in deferred tax assets and an increase in deferred tax liabilities in the same year.
True False
28. If an accrual basis taxpayer prepays interest expense, the payment results in an unfavorable temporary book/
tax difference.
True False
29. Which of the following business expenses always results in a difference between taxable income and book income?
A. Rent expense
B. Interest expense
C. Client entertainment
D. Salary expense
30. Southlawn Inc.'s taxable income is computed as follows.
Using a 34% rate, compute Southlawn's tax expense per books and tax payable.
A. Tax expense per books $643,824; tax payable $579,564
B. Tax expense per books $579,564; tax payable $643,824
C. Tax expense per books $817,904; tax payable $579,564
D. None of the above
31. GH&F is a calendar year, accrual basis taxpayer. In October 2012, GH&F received an $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, 2012. 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
32. If an accrual basis taxpayer receives a prepayment of rent income, the receipt results in an unfavorable temporary book/tax difference.
True False
33. This year, Garfield Inc. generated a $25,000 net operating loss. Which of the following statements is false?
A. If Garfield can carry the entire NOL back to deduct against prior year taxable income, the NOL will have no deferred tax consequences.
B. If Garfield can't use any of the NOL as a carryback deduction, the NOL will result in a deferred tax liability.
C. Garfield can elect to give up the carryback of the NOL.
D. If Garfield can't use any of the NOL as a carryback deduction, it can carry the NOL forward for 20 years.
34. Poole Company made a $100,000 cash expenditure this year. Which of the following statements is false?
A. Poole must capitalize the expenditure if it creates a new asset that the company can use for the next four years.
B. Poole must capitalize the expenditure if it extends the estimated useful life of an existing asset by three years.
C. Poole must capitalize the expenditure if it results in a long-term economic benefit to the company.
D. None of the above is false.
35. Kassim Company purchased an asset by paying $35,000 cash and giving the seller its 3-year note for $240,000. Which of the following statements is true?
A. Kassim's book basis and tax basis in the asset is $275,000.
B. Kassim's book basis is $275,000, but its tax basis is $35,000.
C. Kassim's book basis and tax basis in the asset is $35,000.
D. If Kassim is a cash basis taxpayer, its initial tax basis in the asset is zero.
36. A basic premise of federal income tax law is that an expense is deductible unless the Internal Revenue Code specifically prohibits the deduction.
True False
37. Cosmo Inc. paid $15,000 plus $825 sales tax plus a $200 delivery charge for a new business asset. Cosmo's tax basis in the asset is $15,200, and it can deduct the sales tax.
True False
38. Cosmo Inc. purchased an asset costing $67,500 by paying $13,500 cash at date of purchase and giving the seller a 5-year interest-bearing note for the $54,000 balance. Cosmo's tax basis in the asset is $13,500.
True False
39. Colby Company performed professional services for M&E Inc. In exchange for the services, M&E gave Colby a 12-month lease on commercial office space. M&E could have charged $4,350 monthly rent for the space on the open market. Compute Colby's tax basis in the lease.
A. The lease is an intangible asset and therefore has a zero basis to Colby.
B. The lease has a zero basis because Colby obtained the lease at no cost.
C. $52,200.
D. None of the above
40. Broadus., a calendar year taxpayer, purchased a total of $128,300 tangible personalty in 2012. Broadus' taxable income without regard to a Section 179 deduction was $92,600. Which of the following statements is true?
A. Broadus can elect to expense only $92,600 of the cost of the personalty.
B. Broadus can elect to expense the $128,300 cost of the personalty but can deduct only $92,600 of the expense.
C. Broadus can elect to expense only $35,700 of the cost of the personalty.
D. Broadus can elect to expense the $168,300 cost of the personalty but can deduct only $35,700 of the expense.
41. 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
42. Powell Inc. was incorporated and began operations on October 1 and adopted a calendar year for tax purposes. Powell paid $4,200 to the attorney who handled the corporate formation. Which of the following statements is true?
A. If Powell capitalized the $4,200 payment for financial statement purposes, it must also capitalize it for tax purposes.
B. Powell can deduct the $4,200 payment on its first tax return.
C. For tax purposes, Powell must capitalize the $4,200 organizational cost and amortize it over 15 years.
D. None of the above is true.
43. Lenoci Inc. paid $310,000 for equipment three years ago. This year, it sold the equipment for $200,000. Through date of sale, accumulated book depreciation was $93,840 and accumulated tax depreciation was $147,327. Which of the following statements is true?
A. The sale results in a $53,487 favorable temporary book/tax difference.
B. The sale results in a $53,487 unfavorable temporary book/tax difference.
C. The sale results in a $53,487 unfavorable permanent book/tax difference.
D. None of the above is true.
44. O&V sold an asset with a $78,300 adjusted tax basis for $100,000. The purchaser paid $30,000 in cash and assumed O&V's $70,000 mortgage on the asset. Compute O&V's net cash flow from the sale assuming a 35% tax rate.
A. $22,405
B. $13,095
C. $14,105
D. None of the above
45. This year, Ms Lucas sold investment land for $125,000 cash plus the purchaser's assumption of a $50,000 mortgage on the land. Ms. Lucas' tax basis in the land was $93,000. If any recognized gain is taxed at 15 percent, compute the after-tax cash flow from the sale.
A. $62,300
B. $69,700
C. $112,700
D. $162,700
46. Mr. Quick sold marketable securities with a $112,900 tax basis to his 100% owned corporation for $95,000 cash. Which of the following statements is true?
A. If Mr. Quick can offer evidence that the FMV of the securities is $95,000, he can recognize his $17,900 realized loss.
B. If Mr. Quick and his corporation negotiated the terms of the sale at arm's length, Mr. Quick can recognize his $17,900 realized loss.
C. The corporation's tax basis in the securities is $112,900.
D. None of the above is true.
47. Which of the following is a capital asset?
A. Supplies used in a business
B. Business inventory
C. Land used in a business
D. None of the above
48. Rizzi Corporation sold a capital asset with a $692,000 book and tax basis for $650,000 cash. This was Rizzi's only asset sale during the year. The sale results in:
A. $42,000 unfavorable permanent book/tax difference
B. $42,000 unfavorable temporary book/tax difference
C. $42,000 favorable permanent book/tax difference
D. No book/tax difference
49. Mr. and Mrs. Sykes operate a very profitable small business. This year, the Sykes recognized a $100,000 gain on sale of a trade name they had created and copyrighted for use in their business in 1994. Which of the following statements is true?
A. The $100,000 gain is capital gain eligible for a preferential tax rate.
B. The $100,000 gain is capital gain against which the Sykes can deduct any capital losses recognized this year.
C. The $100,000 gain is ordinary business income.
D. Statements a. and b. are true.
50. Norbett Inc. generated $15,230,000 ordinary taxable income and realized a $238,000 net capital loss on the sale of marketable securities this year. Which of the following statements is false?
A. Norbett's net income per books includes the $238,000 net capital loss.
B. Norbett's taxable income is $15,230,000.
C. The $238,000 net capital loss is a favorable book/tax difference.
D. The $238,000 net capital loss is a temporary book/tax difference.