Test Bank for South-Western Federal Taxation 2026-Essentials of Taxation-Individuals and Business Entities 29th Edition by Nellen
ISBN: 9798214044163
9798214044163-TEST-BANK
Chapter
1: Ch01
Introduction to Taxation
Total Questions: 107
Multiple Choice (27)
Q1. [Multiple Choice] · Bloom's: Remember
Which, if any, isnotone of Adam Smith’s canons (principles) of taxation?
a) Economy in collection
b) Certainty
c) Convenience of payment
d) Simplicity ✓ correct
Q2. [Multiple Choice] · Bloom's: Understand
Which, if any, of the following taxes areregressive(rather thanprogressive)?
a) State general sales tax ✓ correct
b) Federal individual income tax
c) Federal estate tax
d) Federal gift tax
Q3. [Multiple Choice] · Bloom's: Understand
Which, if any, of the following transactions willincreasea taxing jurisdiction’s revenue from thead valoremtax imposed on real estate?
a) A resident dies and leaves his farm to his church.
b) A large property owner issues a conservation easement as to some of her land.
c) A tax holiday issued 10 years ago has expired. ✓ correct
d) A bankrupt motel is acquired by the Red Cross and is to be used to provide housing for homeless persons.
e) None of these choices are correct.
Q4. [Multiple Choice] · Bloom's: Understand
Which, if any, of the following transactions willdecreasea taxing jurisdiction’sad valoremtax revenue imposed on real estate?
a) A tax holiday is granted to an out-of-state business that is searching for a new factory site. ✓ correct
b) An abandoned church is converted to a restaurant.
c) A public school is razed and turned into a city park.
d) A local university sells a dormitory that will be converted for use as an apartment building.
Q5. [Multiple Choice] · Bloom's: Understand
Which, if any, of the following is a typical characteristic of anad valoremtax on personalty?
a) Taxpayer compliance is greater for personal use property than for business use property.
b) The tax on automobiles sometimes considers the age of the vehicle. ✓ correct
c) Most states impose a tax on intangibles.
d) The tax on intangibles generates considerable revenue as it is difficult for taxpayers to avoid.
Q6. [Multiple Choice] · Bloom's: Remember Federal excise taxes that areno longer imposedinclude:
a) Tax on air travel.
b) Tax on wagering.
c) Tax on alcohol.
d) None of these choices are correct. ✓ correct
Q7. [Multiple Choice] · Bloom's: Remember Taxesnot imposedby the Federal government include:
a) Tobacco excise tax.
b) Customs duties (tariffs on imports).
c) Tax on rental cars. ✓ correct
d) Gas guzzler tax.
Q8. [Multiple Choice] · Bloom's: Remember Taxes levied bybothstates and the Federal government include:
a) General sales tax.
b) Customs duties.
c) Hotel occupancy tax.
d) None of these choices are correct. ✓ correct
Q9. [Multiple Choice] · Bloom's: Remember Taxes levied byallstates include:
a) Tobacco excise tax. ✓ correct
b) Individual income tax.
c) Inheritance tax.
d) General sales tax.
Q10. [Multiple Choice] · Bloom's: Remember A use tax is imposed by:
a) The Federal government and all states.
b) The Federal government and a majority of the states.
c) All states but not the Federal government.
d) Most of the states but not the Federal government. ✓ correct
Q11. [Multiple Choice] · Bloom's: Apply
Gabriele and Lisa are married and live in a common law state. They want to make gifts to their four children in 2025.What is the maximum amount of the annual exclusion they will be allowed for these gifts?
a) $19,000.
b) $38,000.
c) $76,000.
d) $152,000. ✓ correct
Q12. [Multiple Choice] · Bloom's: Understand Property can be transferred within the family group by gift or at death. One motivation for preferring the gift approach is:
a) To take advantage of the higher unified transfer tax credit available under the gift tax.
b) To avoid a future decline in value of the property transferred.
c) To take advantage of the per donee annual exclusion. ✓ correct
d) To shift income to higher bracket donees.
Q13. [Multiple Choice] · Bloom's: Understand Indicate which, if any, statement isincorrect. State income taxes:
a) Can piggyback to the Federal version.
b) Cannot apply to visiting nonresidents. ✓ correct
c) Can decouple from the Federal version.
d) Can provide occasional amnesty programs.
Q14. [Multiple Choice] · Bloom's: Remember State income taxesgenerallycan be characterized by:
a) The same date for filing as the Federal income tax. ✓ correct
b) No provision for withholding procedures.
c) Allowance of a deduction for Federal income taxes paid.
d) Applying only to individuals but not to corporations.
Q15. [Multiple Choice] · Bloom's: Remember
A characteristic of FICA tax is that:
a) It does not apply when one spouse works for the other spouse.
b) It is imposed only on the employer.
c) It provides a modest source of income in the event of loss of employment.
d) None of these choices are correct. ✓ correct
Q16. [Multiple Choice] · Bloom's: Remember
A characteristic of FUTA is that:
a) It is imposed on both employer and employee.
b) It is imposed solely on the employee.
c) Compliance requires following guidelines issued by both state and Federal regulatory authorities.
✓ correct
d) It is applicable to spouses of employees butnotto any children under age 18.
Q17. [Multiple Choice] · Bloom's: Remember The United States (either Federal, state, or local)does notimpose:
a) Franchise taxes.
b) Severance taxes.
c) Custom duties.
d) Export duties. ✓ correct
Q18. [Multiple Choice] · Bloom's: Understand Both economic and social considerations can be used to justify:
a) Favorable tax treatment for accident and health plans provided for employees and financed by employers.
b) Disallowance of any deduction for expenditures deemed to be contrary to public policy (e.g., fines, penalties, illegal kickbacks, bribes to government officials).
c) Various tax credits, deductions, and exclusions that are designed to encourage taxpayers to obtain additional education. ✓ correct
d) Allowance of a deduction for state and local income taxes paid.
Q19. [Multiple Choice] · Bloom's: Understand Social considerations can be used to justify:
a) Allowance of a credit for child care expenses. ✓ correct
b) Allowing excess capital losses to be carried over to other years.
c) Allowing accelerated amortization for the cost of installing pollution control facilities.
d) Allowing a Federal income tax deduction for state and local sales taxes.
Q20. [Multiple Choice] · Bloom's: Understand
Allowing a tax credit for certain solar energy property can be justified:
a) As helping small businesses.
b) As promoting administrative feasibility.
c) As promoting a government policy to use alternative energy sources. ✓ correct
d) Based on the wherewithal to pay concept.
Q21. [Multiple Choice] · Bloom's: Understand
Provisions in the tax law that promote energy conservation and more use of alternative (nonfossil) fuels can be justified by:
a) Political considerations.
b) Economic and social considerations. ✓ correct
c) Promoting administrative feasibility.
d) Encouragement of small business.
Q22. [Multiple Choice] · Bloom's: Understand
Which, if any, of the following provisionscannotbe justified as mitigating the effect of the annual accounting period concept?
a) Nonrecognition of gain allowed for involuntary conversions. ✓ correct
b) Net operating loss carryover provisions.
c) Use of the installment method to recognize gain.
d) Carryover of excess capital losses.
Q23. [Multiple Choice] · Bloom's: Understand
Which, if any, of the following provisions of the tax lawcannotbe justified as promoting administrative feasibility (simplifying the task of the IRS)?
a) Penalties are imposed for failure to file a return or pay a tax on time.
b) Annual adjustments for indexation increase the amount of the standard deduction allowed.
c) Personal casualty losses in Federally declared disaster areas must exceed 10% of AGI to be deductible.
d) A deduction is allowed for charitable contributions. ✓ correct
Q24. [Multiple Choice] · Bloom's: Understand
A landlord leases property upon which the tenant makes improvements. The improvements are significant and are not made in lieu of rent. At the end of the lease, the value of the improvements are not income to the landlord. This rule is an example of:
a) A clear reflection of income result.
b) The tax benefit rule.
c) The arm’s length concept.
d) The wherewithal to pay concept. ✓ correct
Q25. [Multiple Choice] · Bloom's: Understand
Two years ago, State Y enacted a new income tax credit for college prep materials. The credit is available to individuals and is equal to 40% of the cost of the items. The credit may not exceed $50 in any year. State Y's director of finance has discovered this year that the amount of credit claimed is far higher than expected. Which principle of good tax policy might not have been considered in designing this tax that caused the original cost estimate to be too low?
a) Equity.
b) Simplicity.
c) Economy in collection.
d) Minimum tax gap. ✓ correct
Q26. [Multiple Choice] · Bloom's: Understand
A rationale for the installment sale method tax rule is:
a) Ability to pay. ✓ correct
b) Equity and fairness.
c) Simplicity.
d) Revenue neutrality.
Q27. [Multiple Choice] · Bloom's: Understand “Bracket creep” is avoided by:
a) Using sunset provisions.
b) Providing special tax rules for small businesses.
c) The statute of limitations.
d) Adjusting the rate brackets for inflation annually. ✓ correct
True/False (53)
Q28. [True/False] · Bloom's: Understand The Medicare component of the FICA tax (1.45% on wages) isprogressivebecause the tax due increases as wages increase.
a) true
b) false ✓ correct
Correct answer: False
Q29. [True/False] · Bloom's: Understand
The Federal estate and gift taxes are examples ofprogressiverate taxes.
a) true ✓ correct
b) false
Correct answer: True
Q30. [True/False] · Bloom's: Understand
The Federal excise tax on gasoline has aproportionaleffect on all taxpayers (that is, neither progressive nor regressive).
a) true
b) false ✓ correct
Correct answer: False
Q31. [True/False] · Bloom's: Understand
Currently, the Federal corporate income tax is lessprogressivethan the individual income tax.
a) true ✓ correct
b) false
Correct answer: True
Q32. [True/False] · Bloom's: Understand Mona inherits her mother’s personal residence, which she converts to a furnished rental house. These changes should affect the amount ofad valoremproperty taxes levied on the properties.
a) true ✓ correct
b) false
Correct answer: True
Q33. [True/False] · Bloom's: Understand
Afixturewill be subject to thead valoremtax onpersonaltyrather than thead valoremtax onrealty a) true
b) false ✓ correct
Correct answer: False
Q34. [True/False] · Bloom's: Understand Even if property tax rates are not changed, the amount ofad valoremtaxes imposed on realty may not remain the same.
a) true ✓ correct b) false
Correct answer: True
Q35. [True/False] · Bloom's: Understand Thead valoremtax on personal use personalty is more often avoided by taxpayers than thead valoremtax on business use personalty.
a) true ✓ correct
b) false
Correct answer: True
Q36. [True/False] · Bloom's: Remember An excise tax is often used to try to influence behavior.
a) true ✓ correct b) false
Correct answer: True
Q37. [True/False] · Bloom's: Remember There is a Federal excise tax on hotel occupancy.
a) true
b) false ✓ correct
Correct answer: False
Q38. [True/False] · Bloom's: Remember The Federal gas-guzzler tax applies only to automobiles manufactured overseas and imported into the United States.
a) true
b) false ✓ correct
Correct answer: False
Q39. [True/False] · Bloom's: Remember The amount of the state excise taxes on gasoline varies from state to state.
a) true ✓ correct b) false
Correct answer: True
Q40. [True/False] · Bloom's: Remember Not all of the states that impose a general sales tax also have a use tax.
a) true
b) false ✓ correct
Correct answer: False
Q41. [True/False] · Bloom's: Remember Sales made over the internet are not exempt from the application of a general sales (or use) tax.
a) true ✓ correct
b) false
Correct answer: True
Q42. [True/False] · Bloom's: Remember Two persons who live in the same state but in different counties may not be subject to the same general sales tax rate.
a) true ✓ correct
b) false
Correct answer: True
Q43. [True/False] · Bloom's: Remember States impose either a state income taxora general sales tax, but not both types of taxes.
a) true
b) false ✓ correct
Correct answer: False
Q44. [True/False] · Bloom's: Understand A safe and easy way for a taxpayer to avoid local and state sales taxes is to make the purchase in a state that levies no such taxes.
a) true
b) false ✓ correct
Correct answer: False
Q45. [True/False] · Bloom's: Remember On transfers by death, the Federal government relies on an estate tax, while states may impose an estate tax, an inheritance tax, both taxes, or neither tax.
a) true ✓ correct
b) false
Correct answer: True
Q46. [True/False] · Bloom's: Remember An inheritance tax is a tax on a decedent’s right to pass property at death.
a) true
b) false ✓ correct
Correct answer: False
Q47. [True/False] · Bloom's: Remember One of the major reasons for the enactment of the Federal estate tax was to prevent large amounts of wealth from being accumulated within a family unit.
a) true ✓ correct
b) false
Correct answer: True
Q48. [True/False] · Bloom's: Understand Under Clint’s will, all of his property passes to either the Lutheran Church or to his spouse. No Federal estate tax will be due on Clint’s death.
a) true ✓ correct
b) false
Correct answer: True
Q49. [True/False] · Bloom's: Understand Under the usual state inheritance tax, two heirs, a cousin and a son of the deceased, would not be taxed at the same rate.
a) true ✓ correct
b) false
Correct answer: True
Q50. [True/False] · Bloom's: Remember The annual exclusion, currently $19,000, is available for gift and estate tax purposes.
a) true
b) false ✓ correct
Correct answer: False
Q51. [True/False] · Bloom's: Understand In 2025, José, a widower, sells land (fair market value of $100,000) to his daughter, Linda, for $50,000. José has not made a taxable gift.
a) true
b) false ✓ correct
Correct answer: False
Q52. [True/False] · Bloom's: Understand Julius, a married taxpayer, makes gifts to each of his six children. A maximum of twelve annual exclusions could be allowed as to these gifts.
a) true ✓ correct
b) false
Correct answer: True
Q53. [True/False] · Bloom's: Understand One of the motivations for making a gift is to save on income taxes.
a) true ✓ correct
b) false
Correct answer: True
Q54. [True/False] · Bloom's: Remember The formula for the Federal income tax on corporations is the same as that applicable to individuals.
a) true
b) false ✓ correct
Correct answer: False
Q55. [True/False] · Bloom's: Remember A state income taxcanbe imposed onnonresidenttaxpayers who earn income within the state on an itinerant basis.
a) true ✓ correct b) false
Correct answer: True
Q56. [True/False] · Bloom's: Remember For state income tax purposes, some states allow a credit for dependents rather than a deduction. a) true ✓ correct b) false
Correct answer: True
Q57. [True/False] · Bloom's: Remember Some states use their state income tax return as a means of collecting unpaid use tax. a) true ✓ correct b) false
Correct answer: True
Q58. [True/False] · Bloom's: Remember No state may offer an income tax amnesty program more than once. a) true b) false ✓ correct
Correct answer: False
Q59. [True/False] · Bloom's: Remember For Federal income tax purposes, there never has been a general amnesty period. a) true ✓ correct b) false
Correct answer: True
Q60. [True/False] · Bloom's: Remember Under state amnesty programs, all delinquent and unpaid income taxes are forgiven. a) true b) false ✓ correct
Correct answer: False
Q61. [True/False] · Bloom's: Remember When a state decouples from a Federal tax provision, it means that this provision willnotapply for state income tax purposes. a) true ✓ correct b) false
Correct answer: True
Q62. [True/False] · Bloom's: Remember The principal objective of the FUTA tax is to provide some measure of retirement security. a) true b) false ✓ correct
Correct answer: False
Q63. [True/False] · Bloom's: Remember Currently, the tax base for the Social Security component of the FICA isnotlimited to a dollar amount. a) true b) false ✓ correct
Correct answer: False
Q64. [True/False] · Bloom's: Understand A parent employs her twin daughters, age 17, in her sole proprietorship. The daughters arenotsubject to FICA coverage.
a) true ✓ correct b) false
Correct answer: True
Q65. [True/False] · Bloom's: Understand Unlike FICA, FUTA requires that employers comply with state as well as Federal rules.
a) true ✓ correct b) false
Correct answer: True
Q66. [True/False] · Bloom's: Understand Upon audit by the IRS, Faith is assessed a deficiency of $40,000 of which $25,000 is attributable to negligence. The 20% negligence penalty will apply to $25,000.
a) true ✓ correct b) false
Correct answer: True
Q67. [True/False] · Bloom's: Understand The objective ofpay-as-you-go(paygo) is to improve administrative feasibility. a) true ✓ correct b) false
Correct answer: True
Q68. [True/False] · Bloom's: Understand When Congress enacts a tax cut that is phased in over a period of years, revenue neutrality is achieved. a) true b) false ✓ correct
Correct answer: False
Q69. [True/False] · Bloom's: Understand A tax cut enacted by Congress that contains asunset provisionwill make the tax cut temporary. a) true ✓ correct b) false
Correct answer: True
Q70. [True/False] · Bloom's: Understand The tax law provides various tax credits, deductions, and exclusions that are designed to encourage taxpayers to obtain additional education. These provisions can be justified on both economic and equity grounds.
a) true b) false ✓ correct
Correct answer: False
Q71. [True/False] · Bloom's: Understand
Various tax provisions encourage the creation of certain types of retirement plans. Such provisions can be justified on both economic and social grounds.
a) true ✓ correct
b) false
Correct answer: True
Q72. [True/False] · Bloom's: Understand
To lessen or eliminate the effect of multiple taxation, a taxpayer who is subject to both foreign and U.S. income taxes on the same income is allowed either a deduction or a credit for the foreign tax paid.
a) true ✓ correct
b) false
Correct answer: True
Q73. [True/False] · Bloom's: Understand
To mitigate the effect of the annual accounting period concept, the tax law permits the carryforward of excess charitable contributions of a particular yearto other years.
a) true ✓ correct
b) false
Correct answer: True
Q74. [True/False] · Bloom's: Understand
Jason’s business warehouse is destroyed by fire. Because the insurance proceeds exceed the basis of the property, a gain results. If Jason shortly reinvests the proceeds in a new warehouse, no gain is recognized due to the application of the wherewithal to pay concept.
a) true ✓ correct
b) false
Correct answer: True
Q75. [True/False] · Bloom's: Understand
Because it is consistent with the wherewithal to pay concept, the tax law requires a seller to recognize a gain in the year the installment sale occurs.
a) true
b) false ✓ correct
Correct answer: False
Q76. [True/False] · Bloom's: Understand
A provision in the law that compels accrual basis taxpayers to pay a tax on prepaid income in the year received andnotwhen earned is consistent with generally accepted accounting principles.
a) true
b) false ✓ correct
Correct answer: False
Q77. [True/False] · Bloom's: Understand
As a matter of administrative convenience, the IRS would prefer to have Congress decrease (rather than increase) the amount of the standard deduction allowed to individual taxpayers.
a) true
b) false ✓ correct
Correct answer: False
Q78. [True/False] · Bloom's: Understand In cases of doubt, courts have held that tax relief provisions should be broadly construed in favor of taxpayers.
a) true
b) false ✓ correct
Correct answer: False
Q79. [True/False] · Bloom's: Understand On occasion, Congress has to enact legislation that clarifies the tax law in order to change a result reached by the U.S. Supreme Court.
a) true ✓ correct
b) false
Correct answer: True
Q80. [True/False] · Bloom's: Understand Ultimately, most taxes are paid by individuals.
a) true ✓ correct
b) false
Correct answer: True
Short Response (3)
Q81. [Short Response] · Bloom's: Apply Taylor, a widow, makes cash gifts to her five married children (including their spouses) and to her seven grandchildren. What is the maximum amount Taylor can give for calendar year 2025 without using her unified transfer tax credit?
Suggested answer: $323,000 [$19,000 (annual exclusion)×17 donees].
Q82. [Short Response] · Bloom's: Apply Paige is the sole shareholder of Citron Corporation. During the year, she leases a building to Citron for a monthly rental of $80,000. If the fair rental value of the building is $60,000, what are the income tax consequences to the parties involved?
Suggested answer: The rent charged by Paige is not “arms length”; as such, Citron Corporation’s rent deduction is $60,000 (not $80,000). The $20,000 difference is a nondeductible dividend distribution. For Paige, the change merely requires reclassification. Instead of $80,000 of rent income, she has $60,000 of rent income and $20,000 of dividend income.
Q83. [Short Response] · Bloom's: Apply In 1994, Martina leased real estate to Drab Corporation for 20 years. Drab Corporation made significant capital improvements to the property. In 2013, Drab decided not to renew the lease and vacated the property. At that time, the value of the improvements was $800,000. Martina sells the real estate in 2025 for $1,200,000 of which $900,000 is attributable to the improvements. When is Martina taxed on the improvements made by Drab Corporation?
Suggested answer: Martina is not subject to taxation on the improvements until she disposes of the property (i.e.,2025). After a controversial Supreme Court decision years ago, Congress clarified the tax law to make it more consistent with the wherewithal to pay concept.
Essay (23)
Q84. [Essay] · Bloom's: Understand
The Federal income tax is based on a pay-as-you-go system and has become a “mass tax.” Explain this statement.
Suggested answer: The pay-as-you-go system is present in the wage and other withholding procedures. In the case of self-employed persons, it is manifested in the required quarterly payments for estimated taxes. The income tax became a mass tax during World War II when its coverage was extended to 74% of the population (from less than 6% in 1939).
Q85. [Essay] · Bloom's: Understand
Due to population change, Goose Creek School District has decided to close one of its high schools. Since it has no further need of the property, the school is listed for sale. The two bids it receives are as follows:
United Methodist Church$1,700,000
Planet Motors1,600,000
The United Methodist Church would use the property to establish a sectarian middle school. Planet, a well-known car dealership, would revamp the property and operate it as a branch location.
If you were a member of the School District board, what factors would you consider in evaluating the two bids?
Suggested answer: Although the bid from the United Methodist Church is higher, several other factors need to be considered. Does, for example, Goose Creek School District exempt property owned by churches from itsad valoremtaxes? If so, losing this property from the tax base could prove very costly over the long run. Also, it is probable that income-producing property (such as a car dealership) would be taxed at a higher rate than that owned by a nonprofit organization (a school operated by a church). This assumes, of course, that the school would be taxed at all. The auto dealership also would generate sales tax.
Q86. [Essay] · Bloom's: Understand Morgan inherits her father’s personal residence including all of the furnishings. She plans to add a swimming pool and sauna to the property and rent it as a furnished house. What are some of thead valoremproperty tax issues Morgan can anticipate?
Suggested answer: The real estate taxes probably will increase for several reasons. The capital improvements and the conversion from residential to rental will trigger the increase. Furthermore, the furnishings may generate anad valoremtax on personalty. (Depending on applicable law, furniture might not be subject to tax unless used for business purposes—such as in this case.)
Q87. [Essay] · Bloom's: Understand In 2023, Deborah became 65 years old. In 2024 she added a swimming pool and in 2025 she converted the residence to rental property and moved into an assisted living facility. Since 2022, Deborah’sad valoremproperty taxes have decreased once and increased twice. Explain.
Suggested answer: The decrease probably came in 2023 when Deborah reached age 65. The increases probably occurred in 2024 when she added the pool and in 2025 when the residence was converted to rental property with the property reassessed due to the change in use and/or removal of the homestead exemption.
Q88. [Essay] · Bloom's: Understand
A lack of compliance in the payment of use taxes can be resolved by several means. In this regard, comment on the following:
a.Registration of automobiles.
b.Reporting of Internet purchases on state income tax returns.
Suggested answer: a.
As reflected in Example 5, re-registration of a car purchased out of state is the occasion for the owner’s home state to collect the use tax.
b.
Completing the state income tax return reminds (or forces) the taxpayer to pay use tax on out of state purchases.
Q89. [Essay] · Bloom's: Analyze
What are the pros and cons of the following state and local tax provisions?
a.Anad valoremproperty tax holiday made available to a manufacturing plant that is relocating.
b.Hotel occupancy tax and a rental car surcharge.
c.A back-to-school sales tax holiday.
Suggested answer: a.
Such a holiday is designed to attract new industry to the area. This will bring more jobs and growth in consumption. On the other hand, if the tax holiday is too generous, this places a strain on available public revenue. The result could be that schools and capital maintenance (roads, public services) will suffer.
b.
The hotel occupancy tax and car rental surcharges are popular because they mainly impact visitors. Also, they can generate considerable revenue to finance major capital improvements. If these taxes become excessive, however, they could discourage major events (such as conventions).
c.
Such holidays are popular with both merchants and consumers and serve the social need of defraying some of the costs of sending children to school. Once established, however, they are difficult to get rid of. Thus, they become an annual drain on sales tax revenue.
In addition, since they are available to buyers at all income levels, they provide tax savings to taxpayers who do not need them and who might obtain greater tax breaks than others, as they have more funds to spend on the tax free items.
Q90. [Essay] · Bloom's: Evaluate
What is a severance tax? How productive can it be in terms of generating revenue?
Suggested answer: A severance tax is one imposed when natural resources (e.g., oil, gas, iron ore, coal) are extracted. It is based on the notion that the state has an interest in such resources. For some states, the revenue from severance taxes can be significant. Alaska, for example, relies heavily on its severance taxes and has been able to avoid both a state income tax and a general sales tax.
Q91. [Essay] · Bloom's: Evaluate
What is the difference between an inheritance tax and an estate tax? Who imposes these taxes?
Suggested answer: An inheritance tax is a tax on the right to receive property from a decedent. An estate tax is imposed on the right to pass property at death. The Federal government imposes estate taxes and states impose inheritance taxes. Some states impose both, whereas others impose neither.
Q92. [Essay] · Bloom's: Apply
Antonio dies with an estate worth $20 million. Under his will, $10 million passes to his spouse and $10 million goes to his church. What is Antonio’s Federal estate tax result?
Suggested answer: None. After a marital deduction of $10 million and a charitable deduction of $10 million, Antonio’s taxable estate is $0.
Q93. [Essay] · Bloom's: Understand
What might cause an individual to owe income taxes in more than one state?
Suggested answer: Working in more than one state or owning income-generating property in more than one state can cause this.
Q94. [Essay] · Bloom's: Understand
Virtually all state income tax returns contain checkoff boxes for donations to various causes. On what grounds has this procedure been criticized?
Suggested answer: In many cases, the procedure is overused (i.e., a multiplicity of boxes). This overuse adds complexity to the return. Also, in most cases, the donation is being drawn from any income tax refund that might be due. Thus, taxpayers may not fully appreciate that they are paying for such checkoffs.
Q95. [Essay] · Bloom's: Evaluate
State and local governments are sometimes forced to find ways to generate additional revenue. Comment on the pros and cons of the following procedures:
a.Decouple what would be part of the piggyback format of the state income tax.
b.Tax amnesty provisions.
c.Internet shaming.
Suggested answer: a.
The decoupling process is easily accomplished regarding new Federal tax changes that have never taken effect at the state level. Taxpayers are not apt to miss what they never have enjoyed.
b.
Tax amnesty provisions generate considerable revenue. It also unmasks many taxpayers who have not previously paid taxes. Now that the taxing jurisdiction is aware of their existence, they will tend to pay taxes in the future.
c.
By use of a public internet site, the taxing authority posts the names of those taxpayers that are delinquent as to various taxes (e.g., sales, income). This public humiliation (or threat of) very often results in compliance.
Q96. [Essay] · Bloom's: Understand Briana lives in one state and works in the adjoining state. Both states tax the income she earns from her job. Does Briana have any relief from this apparent double taxation of the same income?
Suggested answer: Most states allow their residents some form of tax credit for the income taxes paid to other states. In Briana’s case, the credit would be allowed by the state where she lives for the taxes paid to the state where she works.
Q97. [Essay] · Bloom's: Understand
In terms of revenue neutrality, comment on a tax cut enacted by Congress that:
a.Contains revenue offsets.
b.Includes a sunset provision.
Suggested answer: a.
Ideally, to achieve revenue neutrality, all tax cuts should be accompanied by revenue offsets.
b.
A sunset provision does not account for the immediate revenue losses generated by a tax cut. It merely provides that such losses will not continue beyond a specified date when the tax cut expires and the former tax law is reinstated.
Q98. [Essay] · Bloom's: Understand
The tax law contains various tax credits, deductions, and exclusions that are designed to encourage taxpayers to obtain additional education. On what grounds can these provisions be justified?
Suggested answer: Social and economic considerations are the justification. As to the latter, a better educated workforce carries a positive economic impact.
Q99. [Essay] · Bloom's: Understand
The tax law contains various provisions that encourage home ownership.
a.On what basis can this objective be justified?
b.Are there any negative considerations? Explain.
Suggested answer: a.Home ownership can be justified on economic and social grounds. b.
Granting tax advantages to persons who are purchasing their homes places the taxpayers who rent at a disadvantage. The result is inequality in treatment.
Q100. [Essay] · Bloom's: Understand
The tax law allows an income tax deduction (or a credit) for foreign income taxes. Explain why.
Suggested answer: The deduction (or a credit) for foreign income taxes can be justified on the grounds that it mitigates the double tax imposed on the same income.
Q101. [Essay] · Bloom's: Understand
The tax law allows, under certain conditions, deferral of gain recognition for involuntary conversions.
a.What is the justification for this relief measure? b.What happens if the proceeds are not entirely reinvested?
Suggested answer: a.
By recognizing that the taxpayer’s relative economic situation has not changed and that they lack the wherewithal to pay a tax, any recognition of realized gain is deferred. b.
If the proceeds from an involuntary conversion are not fully reinvested in property that is similar or related in service or use, recognized gain results. Such recognized gain cannot exceed realized gain and will be limited to the amount of the proceeds not reinvested. Recognition is based on the notion that the taxpayer now has the wherewithal to pay the tax that results.
Q102. [Essay] · Bloom's: Understand
How do the net operating loss provisions in the tax law mitigate the effect of the annual accounting concept?
Suggested answer: Without the allowance of a loss carryforward, the losses would disappear. As shown by Example 27, this result places a business with profit and loss fluctuations on a more level playing field with one that maintains a stable income pattern.
Q103. [Essay] · Bloom's: Understand
Congress reacts to judicial decisions that interpret the tax law in different ways. When it approves of a decision, Congress may act to amend the Code to incorporate the holding. When it disapproves, Congress may amend the Code to nullify its effect. Give an example of each one of these congressional reactions. Suggested answer: Congress approved of the judicial conclusion that most stock dividends should be nontaxable and amended the Code to this effect. However, it disagreed as to when leasehold improvements should be taxed to a lessor. Consistent with the wherewithal to pay concept, the improvements are to be taxed on the termination of the lease. Thus, Congress overturned a judicial holding that would have taxed such improvements in the year they are made by the lessee.
Q104. [Essay] · Bloom's: Understand
Can a taxpayer start the three-year statute of limitations on additional assessments by the IRS by filing his income tax return early (i.e., before the due date)? Can the period be shortened by filing late (i.e., after the due date)?
Suggested answer: The answer isnoin both cases. When filing early, the statute starts to run on the due date of the return. When filing late however, the filing date controls.
Q105. [Essay] · Bloom's: Understand
Congressman Smith wants to impose a new tax on sugar drinks. Analyze this proposal against the principles of equity, simplicity, and neutrality.
Suggested answer: Equity – The tax is regressive in that it will represent a larger portion of a low-income individual’s income relative to a higher-income individual.
Simplicity – While it sounds simple because the ingredients on a container should indicate if there is sugar, issues might arise as to how other forms of sugar, such as corn syrup, affect application of the tax. Also, the amount of sugar in beverages can vary, so some might argue that the tax should not apply if the sugar level is minimal. Will the tax apply to drinks already subject to the alcohol taxes? (Include some discussion of problems of defining sugar drink in the answer.)
Neutrality – The tax will likely reduce sales of sugar drinks.
Q106. [Essay]
Ultimately, most taxes are paid by individuals. Explain what this means in terms of income and payroll taxes paid by a corporation.
Suggested answer: A corporation pays many types of taxes, but like any other expenditure, some of these taxes are ultimately paid by an individual. Income taxes are included in the price the corporation charges for goods and services. Or all or part might result in reduced earnings affecting investors or through reduced wages affecting employees. The payroll taxes paid by the corporate employer are likely borne by workers in the form of lower wages. That is, if the employer did not have to pay the taxes, it could pay higher wages to employees. These taxes might also be borne by customers and investors.
Matching (1)
Q107. [Matching] · Bloom's: Understand Using the following choices, show the justification for each provision of the tax law listed.
a) (no text)
b) (no text)
c) (no text)
d) (no text)