Sample Questions and Answers
A “like-kind exchange” under Section 1031 allows a taxpayer to:
A) Defer capital gains taxes on the sale of certain types of property if the proceeds are reinvested in similar property
B) Exclude income from the sale of property held for personal use
C) Transfer assets without incurring gift taxes
D) Defer taxes on long-term capital gains until retirement
Answer: A
“Passive income” is income that:
A) Is earned from work performed as an independent contractor
B) Comes from investments such as dividends, rents, and royalties
C) Is excluded from taxation under certain tax treaties
D) Is taxed at a lower rate for business owners
Answer: B
The “tax reform” in the U.S. in 2017 primarily focused on:
A) Increasing tax rates for high-income individuals
B) Reducing corporate tax rates and simplifying the tax code
C) Providing a universal basic income
D) Creating new deductions for home ownership
Answer: B
Which of the following best describes “boot” in a 1031 exchange?
A) Cash or other non-like-kind property received in a transaction that does not qualify for tax deferral
B) An exemption from capital gains tax on real property
C) A credit applied to tax liability for depreciated property
D) Property that does not qualify for a like-kind exchange
Answer: A
A “tax return preparer” is someone who:
A) Files taxes on behalf of the taxpayer but has no legal responsibility for the accuracy of the information
B) Provides tax advice and prepares returns for compensation
C) Reviews tax documents but does not provide recommendations
D) Represents taxpayers before the IRS in disputes
Answer: B
The “taxable year” for an individual taxpayer is generally:
A) From January 1 to December 31
B) From the time the tax return is filed until the IRS accepts the refund
C) The period during which a corporation must file its annual return
D) The period during which tax penalties are applied
Answer: A
Which of the following would be considered a “constructive dividend” under tax law?
A) A distribution of profits to shareholders by a corporation
B) A payment to a shareholder disguised as an expense or deduction
C) A tax refund issued to a corporation
D) A capital gain realized by the sale of shares
Answer: B
Which of the following is NOT a characteristic of “corporate tax shelters”?
A) They aim to reduce a corporation’s taxable income
B) They often involve offshore investments or transactions
C) They are strictly regulated and have little legal ambiguity
D) They might involve transactions that artificially lower tax liability
Answer: C
The “Step Transaction Doctrine” is primarily used to:
A) Determine whether multiple related transactions should be treated as a single, unified transaction for tax purposes
B) Determine the tax rate for a capital gains transaction
C) Identify whether a taxpayer qualifies for tax credits
D) Define the criteria for when tax avoidance strategies are valid
Answer: A
“Tax transparency” in the context of business entities refers to:
A) Ensuring that business tax returns are shared with the public
B) The practice of not disclosing the taxes paid by businesses to governments
C) A business model where income flows through to shareholders or owners, who report the income on their tax returns
D) The use of offshore tax havens to minimize reporting obligations
Answer: C
The “substance over form” doctrine in tax law states that:
A) Taxpayers must report their income as it appears on their tax returns, regardless of the underlying transaction
B) Courts will focus on the actual substance and intent of a transaction, not just its legal form, when determining tax consequences
C) The IRS has the authority to change the legal form of a taxpayer’s transaction to suit its interpretation
D) Taxpayers are not required to disclose the underlying substance of their business transactions
Answer: B
“International tax treaties” are used to:
A) Prevent double taxation and encourage cross-border business and investment
B) Ensure that tax rates are consistent across all countries
C) Regulate the taxation of offshore bank accounts
D) Provide tax deductions for international travelers
Answer: A
“Deferred taxes” are typically recorded when:
A) There is a difference between the financial accounting and tax treatment of income or expenses
B) A taxpayer has overpaid taxes and expects a refund
C) A business accrues more expenses than it reports for tax purposes
D) Taxes owed are immediately due and paid
Answer: A
“Tax sovereignty” refers to:
A) A country’s exclusive right to impose taxes on its citizens and residents
B) The tax treaties between countries to avoid double taxation
C) The rules governing tax exemptions for foreign corporations
D) The ability of taxpayers to avoid paying taxes in their home country by shifting income abroad
Answer: A
The “economic substance” doctrine is designed to:
A) Limit the ability of taxpayers to claim deductions based on a transaction’s actual business purpose
B) Prevent the IRS from taxing foreign income
C) Allow taxpayers to take deductions based on their income source
D) Provide a tax shelter for foreign investments
Answer: A
The “substantial presence test” is used to determine:
A) Whether a foreign business is subject to U.S. tax
B) The residency status of an individual for tax purposes
C) Whether income derived from overseas can be exempt from U.S. taxes
D) The amount of tax credits that can be claimed by a taxpayer
Answer: B
The “wash sale” rule disallows the deduction of a loss on the sale of a security if:
A) The sale is made to a related party
B) The security is repurchased within 30 days
C) The security is purchased in a tax-deferred exchange
D) The security is held for longer than a year
Answer: B
Which of the following best describes “tax treaties”?
A) Agreements between states within a country to impose taxes on citizens
B) Bilateral agreements between countries to prevent double taxation and allocate taxing rights
C) Arrangements within the U.S. tax code to provide tax relief to certain industries
D) Rules governing the taxation of foreign income from investments
Answer: B
A “nexus” in state tax law refers to:
A) A foreign corporation’s ability to avoid state taxes by claiming residency in another state
B) The level of business activity or presence a company must have within a state to be subject to that state’s tax laws
C) A federal tax requirement for corporations to disclose foreign income
D) A provision that ensures tax credits are granted to businesses operating in multiple states
Answer: B
“Capital gains tax” is typically applied to:
A) Profits earned from the sale of assets or investments
B) Business income earned by corporations
C) Interest income from bonds
D) Wages paid to employees for services rendered
Answer: A
Which of the following defines “corporate inversion”?
A) When a U.S. corporation reincorporates in a foreign country to reduce its tax liability
B) When a corporation transfers its assets to a foreign country without changing its legal status
C) The process by which a foreign corporation acquires a U.S. corporation
D) The practice of investing in tax-exempt bonds to reduce corporate taxes
Answer: A
The term “basis” refers to:
A) The amount of income that is taxable
B) The value of property for tax purposes, used to determine gain or loss on its sale
C) The gross income that an individual receives in a year
D) The income an individual receives after deductions and credits
Answer: B
Which of the following tax laws primarily governs tax-exempt organizations?
A) The Internal Revenue Code (IRC) Section 501(c)(3)
B) The Foreign Account Tax Compliance Act (FATCA)
C) The Taxpayer Bill of Rights (TBOR)
D) The Tax Reform Act of 1986
Answer: A
“Tax evasion” refers to:
A) Structuring financial transactions to comply with tax laws
B) Fraudulently attempting to avoid paying taxes owed
C) Reducing taxable income through legal deductions
D) Filing taxes late without penalties
Answer: B
A “qualified retirement plan” generally includes all of the following EXCEPT:
A) 401(k) plans
B) Defined benefit plans
C) Flexible spending accounts
D) Traditional IRAs
Answer: C
“Self-employment tax” is typically paid by:
A) Independent contractors and business owners to fund Social Security and Medicare
B) Employees working for corporations that do not provide health insurance
C) Employers on behalf of their employees
D) Nonprofit organizations to fund employee benefits
Answer: A
The “origin of the claim” test is used in tax law to determine:
A) Whether an expense can be deducted from gross income
B) The appropriate tax rate to apply to a taxpayer’s income
C) Whether an expense is deductible based on the source of income that generated it
D) How to classify income as personal or business-related
Answer: C
The “arm’s length” principle in international taxation refers to:
A) The requirement that transactions between related entities be conducted as though they were between unrelated parties, ensuring that transfer prices reflect market value
B) The IRS’ ability to audit businesses operating internationally
C) A rule that allows multinational corporations to defer taxes on foreign income
D) The requirement that tax treaties between countries must be fair and equitable to all parties
Answer: A
The “steps to apply the tax research process” include all of the following EXCEPT:
A) Identifying the relevant issue or question
B) Gathering all available legal research tools, including primary and secondary sources
C) Making decisions without understanding the underlying facts
D) Analyzing and applying the relevant rules and principles to the facts of the case
Answer: C
“Taxpayers with a foreign financial account” must report it to the IRS under:
A) The Foreign Account Tax Compliance Act (FATCA)
B) The U.S. Taxpayer Protection Act
C) The IRS International Compliance Program
D) The Offshore Investment Disclosure Act
Answer: A
A “qualified personal residence trust” (QPRT) is used to:
A) Allow individuals to exclude a portion of rental income from taxation
B) Enable a taxpayer to reduce their estate tax liability by transferring ownership of a residence to a trust while retaining the right to live in the home for a period of time
C) Enable businesses to claim tax deductions on personal residences used for business purposes
D) Transfer assets to heirs tax-free
Answer: B
The “business interest deduction limitation” under the Tax Cuts and Jobs Act (TCJA) primarily applies to:
A) Large businesses with significant interest expense
B) Small businesses with fewer than 50 employees
C) Businesses claiming expenses for employee benefits
D) The deductibility of losses on investments in tax-deferred accounts
Answer: A
The “self-reporting” principle in tax law means that:
A) Taxpayers are responsible for reporting their income and calculating their tax liability
B) The IRS automatically audits all taxpayers for potential fraud
C) Only self-employed individuals must report their taxes directly to the IRS
D) Taxpayers are responsible for the IRS determining their tax rate
Answer: A
The “tax treatment of fringe benefits” generally includes all of the following EXCEPT:
A) Employer-provided health insurance is typically excluded from taxable income
B) Stock options given to employees are usually taxed when exercised
C) Non-cash gifts provided to employees are always taxable
D) Educational assistance programs may qualify for tax-free treatment
Answer: C
A “tax credit” differs from a “tax deduction” in that it:
A) Directly reduces the amount of tax owed rather than reducing taxable income
B) Is applicable only to businesses, not individuals
C) Is applied before calculating taxable income
D) Only applies to capital gains
Answer: A
“Debt-for-equity swaps” in tax law refer to:
A) The process by which a taxpayer sells debt in exchange for cash
B) A situation in which a business cancels debt in exchange for equity in the company
C) The ability to exchange taxable bonds for tax-exempt government bonds
D) The reduction of a company’s tax liability by swapping debt across borders
Answer: B
Which of the following best describes “transfer pricing” rules?
A) The rules that govern how multinational companies allocate their income between different jurisdictions to avoid double taxation
B) The tax rates applied to personal income based on filing status
C) The tax code provisions that dictate how U.S. residents should report foreign earnings
D) The rules that allow businesses to set prices for goods and services
Answer: A
The “de minimis fringe benefit rule” allows employers to:
A) Provide employees with tax-free goods and services within a small, nominal value threshold
B) Deduct employee expenses without any reporting requirements
C) Pay employee wages below the federal minimum wage
D) Reduce employee payroll taxes through non-cash compensation
Answer: A
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