Federal Income Tax
Mock Exam
Course Introduction
Federal Income Tax explores the fundamental principles and policies underlying the federal taxation of individual income in the United States. The course examines the Internal Revenue Code, Treasury Regulations, and judicial decisions to provide a comprehensive understanding of the determination of gross income, exclusions, deductions, personal and business expenses, accounting and tax periods, and property transactions. Emphasis is placed on statutory interpretation, tax policy considerations, and practical application of tax rules to common factual scenarios encountered by individuals and legal professionals. The course prepares students to identify tax issues and analyze the consequences of various transactions in both personal and professional contexts.
Recommended Textbook
South Western Federal Taxation 2018 Individual Income Taxes 41st Edition by
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Page 2
William H. Hoffman
Chapter 1: An Introduction to Taxation and Understanding
Federal Tax Law
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Sample Questions
Q1) For Federal income tax purposes, there never has been a general amnesty period.
A)True
B)False Answer: True
Q2) If the tax deficiency is attributable to fraud, the negligence penalty will not be imposed.
A)True
B)False Answer: True
Q3) The Federal income tax on individuals generates more revenue than the Federal income tax on corporations.
A)True
B)False Answer: True
Q4) In terms of revenue neutrality, comment on a tax cut enacted by Congress that: a.contains revenue offsets.
b.includes a sunset provision.
Answer: 11ea84d6_582f_6420_a79c_497b7537c3f7_TB1280_00
Q5) No return and statute limitations
Answer: j
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Chapter 2: Working With the Tax Law
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Q1) A "Bluebook" is substantial authority for purposes of the accuracy related penalty.
A)True
B)False
Answer: True
Q2) In recent years, Congress has been relatively successful in simplifying the Internal Revenue Code.
A)True
B)False
Answer: False
Q3) A taxpayer must pay any tax deficiency assessed by the IRS and sue for a refund to bring suit in the U.S. Court of Federal Claims. Only in the Tax Court can jurisdiction be obtained without first paying the assessed tax deficiency.
A)True
B)False
Answer: True
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Chapter 3: Tax Formula and Tax Determination; an
Overview of Property Transactions
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Q1) A decrease in a taxpayer's AGI could increase the amount of medical expenses that can be deducted.
A)True
B)False Answer: True
Q2) Nonresident alien Answer: d
Q3) Average income tax rate Answer: b
Q4) A half-brother who lives with taxpayer. Answer: c
Q5) Abandoned spouse Answer: e
Q6) Under the Federal income tax formula for individuals, a choice must be made between claiming deductions for AGI and itemized deductions.
A)True
B)False Answer: False
Q7) Gain on collectibles (held more than one year) Answer: j Page 5
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Margaret owns land that appreciates at the rate of 10% each year. Ralph owns a zero coupon (i.e., all of the interest is paid at maturity but is taxed annually) corporate bond with a yield to maturity of 10%. At the end of 10 years, the bond will mature and the land will be sold. At the end of the 10 years,
A)Margaret and Ralph will have accumulated the same after-tax amounts.
B)Ralph will have accumulated a greater after-tax amount because the interest on the bond is tax-exempt.
C)Margaret will have accumulated the greater after-tax amount because the gain on the land is tax-exempt.
D)Margaret will have accumulated the greater after-tax amount but only if her marginal tax rate never exceeds 27%.
E)Margaret will accumulate the greater after-tax amount because she earns a return on the deferred taxes.
Q2) Barney painted his house which saved him $3,000. According to the realization requirement, Barney must recognize $3,000 of income.
A)True
B)False
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Chapter 5: Gross Income: Exclusions
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Q1) Workers' compensation benefits are included in gross income if the employer also pays the employee while the employee is recovering from his or her injury.
A)True
B)False
Q2) If a scholarship does not satisfy the requirements for a gift, the scholarship must be included in gross income.
A)True
B)False
Q3) Ed died while employed by Violet Company. His wife collected $40,000 on a group term life insurance policy that Violet provided its employees, and $6,000 of accrued salary Ed had earned prior to his death. All of the premiums on the group term life insurance policy were excluded from the Ed's gross income. Ed's wife is required to recognize as gross income only the $6,000 she received for the accrued salary.
A)True
B)False
Q4) What are the tax problems associated with payments received by a wife from her deceased husband's employer? (Assume the wife renders no services to the employer.)
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Chapter 6: Deductions and Losses: in General
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Q1) Which of the following is not relevant in determining whether an activity is profit-seeking or a hobby?
A)Whether the activity is enjoyed by the taxpayer.
B)The expertise of the taxpayers or their advisers.
C)The time and effort expended.
D)The relationship of profits earned and losses incurred.
E)All of the above are relevant factors.
Q2) The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction.
A)True
B)False
Q3) The legal cost of having a will prepared is not deductible.
A)True
B)False
Q4) During the year, Jim rented his vacation home for 200 days and lived in it for 19 days. During the remaining days, the vacation home was available for rental use. Is the vacation home subject to the limitation on the deductions of a personal/rental vacation home?
Q5) Briefly discuss the disallowance of deductions for capital expenditures.
Q6) Are there any circumstances under which lobbying expenditures are deductible?
Page 9
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) An NOL carryforward is used in determining the current year's charitable contribution deduction.
A)True
B)False
Q2) If personal casualty gains exceed personal casualty losses (after deducting the $100 floor), there is no itemized deduction.
A)True
B)False
Q3) The excess of nonbusiness capital gains over nonbusiness capital losses must be added to taxable income to compute the net operating loss of an individual.
A)True
B)False
Q4) A bona fide debt cannot arise on a loan between father and son. A)True B)False
Q5) Discuss the computation of NOL remaining to be carried forward after the NOL has been applied in a carryback year.
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Q6) Why was the domestic production activities deduction (DPAD) enacted by Congress?
Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Sample Questions
Q1) Once the more-than-50% business usage test is passed for listed property, it still matters if the business usage for the property drops to 50% or less during the recovery period.
A)True
B)False
Q2) On March 1, 2017, Lana leases and places in service a passenger automobile. The lease will run for five years and the payments are $500 per month. During 2017, she uses her car 60% for business and 40% for personal activities. Assuming the dollar amount from the IRS table for auto leases is $70, determine Lana's gross income attributable to the lease.
A)$0
B)$35
C)$59
D)$70
E)None of the above
Q3) Rustin bought used 7-year class property on May 15, 2017, for $738,000. Rustin elects § 179 and straight-line cost recovery. Rustin's taxable income would not create a limitation for purposes of the § 179 deduction. Determine the maximum cost recovery deduction Rustin can claim for 2017.
Page 11
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) In which, if any, of the following situations is the automatic mileage available?
A)A limousine to be rented by the owner for special occasions (e.g., weddings, high school proms).
B)The auto belongs to taxpayer's mother.
C)One of seven cars used to deliver pizzas.
D)MACRS statutory percentage method has been claimed on the automobile.
E)None of these.
Q2) Under the right circumstances, a taxpayer's meals and lodging expense can qualify as a deductible education expense.
A)True
B)False
Q3) Sue has unreimbursed expenses.
Q4) When contributions are made to a traditional IRA, they are deductible by the participant. Later distributions from the IRA upon retirement are fully taxed.
A)True
B)False
Q5) Club dues deductible
Q6) Sue does not work for other parties.
Page 12
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) Paul and Patty Black (both are age 66) are married and together have AGI of $105,000 in 2017. They have two dependents and file a joint return. During the year, they paid $8,000 for medical insurance, $15,000 in doctor bills and hospital expenses, and $1,000 for prescribed medicine and drugs.
a.In December 2017, the Blacks received an insurance reimbursement of $3,500 for hospitalization expenses. Determine the deduction allowable for medical expenses paid during the year.
b.Assume instead that the Blacks received the $3,500 insurance reimbursement in February 2018. Determine the deduction allowable for medical expenses incurred in 2017. c.Assume that the Blacks received the $3,500 insurance reimbursement in February 2018. Discuss whether the reimbursement will be included in their gross income for 2018.
Q2) During 2017, Kathy, who is self-employed, paid $650 per month for an HSA contract that provides medical insurance coverage with a $3,000 deductible. The plan covers Kathy, her husband, and their three children. Of the $650 monthly fee, $300 was for the high-deductible policy, and $350 was deposited into an HSA. How much of the amount paid for the high-deductible policy can Kathy deduct as a deduction for AGI?
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Page 13
Chapter 11: Investor Losses
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Q1) Jackson Company incurs a $50,000 loss on a passive activity during the year. The company has active income of $34,000 and portfolio income of $24,000. If Jackson is a personal service corporation, it may deduct $34,000 of the passive activity loss.
A)True
B)False
Q2) Judy owns a 20% interest in a partnership (not real estate) in which her at-risk amount was $35,000 at the beginning of the year. The partnership borrowed $50,000 on a recourse note and made a $40,000 profit during the year. Her at-risk amount at the end of the year is $43,000.
A)True
B)False
Q3) Linda owns investments that produce portfolio income and Activity A that produces losses. From a tax perspective, Linda will be better off if Activity A is not passive.
A)True
B)False
Q4) Identify how the passive activity loss rules broadly classify various types of income and losses. Provide examples of each category.
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Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) Why is there no AMT adjustment for charitable contributions?
Q2) Wallace owns a construction company that builds both commercial and residential buildings. He contracts to build a residential building for $800,000, and for which he is eligible to use the completed contract method of accounting. In the current year for regular income tax purposes, Wallace does not recognize any gross income on the contract. Under the percentage of completion method, the income recognized under the contract would have been $60,000. Wallace's AMT effect is:
A)$0.
B)$60,000 negative adjustment.
C)$60,000 positive adjustment.
D)$800,000 positive adjustment.
Q3) Interest on a home equity loan cannot be deducted for AMT purposes.
A)True
B)False
Q4) The deduction for personal and dependency exemptions is allowed for regular income tax purposes, but is disallowed for AMT purposes. This results in a positive AMT adjustment.
A)True
B)False
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Chapter 13: Tax Credits and Payment Procedures
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Q1) Because current U.S. corporate income tax rates are higher than many foreign corporate income tax rates only infrequently will the credit's, the overall limitation yield a lower foreign tax credit than the amount of foreign taxes actually paid.
A)True
B)False
Q2) Amber is in the process this year of renovating the office building (placed in service in 1976) used by her business. Because of current Federal Regulations that require the structure to be accessible to handicapped individuals, she incurs an additional $11,000 for various features, such as ramps and widened doorways, to make her office building more accessible. The $11,000 incurred will produce a disabled access credit of what amount?
A)$0
B)$5,000
C)$5,125
D)$5,500
Q3) Child and dependent care expenses include amounts paid for general household services.
A)True
B)False
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Page 16
Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Q1) Tariq sold certain U.S. Government bonds and State of Oregon bonds at a loss to offset short-term capital gain from a previous transaction. He felt that the U.S. Government and State of Oregon bonds were "good" investments, so he repurchased identical securities within one week. Do these transactions constitute wash sales? If the bond sales resulted in the recognition of gain (rather than loss), would the wash sale provisions prevent the gains from being recognized?
Q2) Ed and Cheryl have been married for 27 years. They own land jointly with a basis of $300,000. Ed dies in 2017, when the fair market value of the land is $500,000. Under the joint ownership arrangement, the land passed to Cheryl.
a.If Ed and Cheryl reside in a community property state, what is Cheryl's basis in the land?
b.If Ed and Cheryl reside in a common law state, what is Cheryl's basis in the land?
Q3) When a property transaction occurs, what four questions should be considered with respect to the sale or other disposition?
Q4) Discuss the application of holding period rules to property acquired by gift and inheritance.
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Sample Questions
Q1) Kelly, who is single, sells her principal residence, which she has owned and occupied for 8 years, for $375,000. The adjusted basis is $64,000 and selling expenses are $22,000. She purchases another principal residence three months later for $200,000. Her recognized gain is $39,000 and her basis for the new principal residence is $200,000.
A)True
B)False
Q2) If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion) and the amount reinvested in replacement property exceeds the amount realized, the basis of the replacement property is:
A)The cost of the replacement property.
B)The fair market value of the involuntarily converted property minus the postponed gain.
C)The cost of the replacement property minus the postponed gain.
D)The amount realized.
E)None of the above.
Q3) Define an involuntary conversion.
Q4) Discuss the relationship between realized gain and boot received in a § 1031 like-kind exchange.
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) Hiram is a computer engineer and, while unemployed, invents a switching device for computer networks. He patents the device, but does not reduce it to practice. Hiram has a zero tax basis for the patent. In consideration of $800,000 plus a $1 royalty per device sold, Hiram assigns the patent to a computer manufacturing company. Hiram assigned all substantial rights in the patent. Which of the following is correct?
A)Hiram automatically has long-term capital gain from the lump sum payment, but not from the royalty payments.
B)Hiram automatically has long-term capital gain from the royalty payments, but not from the lump sum payment.
C)Hiram automatically has long-term capital gain from both the lump sum payment and the royalty payments.
D)Hiram does not have automatic long-term capital gain from either the lump sum payment or the royalty payments.
E)None of the above.
Q2) Short-term capital gain is eligible for a special tax rate only when it exceeds long-term capital gain.
A)True B)False
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Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Q1) Which of the following events could result in § 1250 depreciation recapture?
A)Sale at a loss of a depreciable business building held more than one year.
B)Sale at a gain of a business building held more than a year on which straight-line depreciation was taken.
C)Sale at a loss of a depreciable business building held for 9 months.
D)Sale at a gain of depreciable equipment held more than a year on which straight-line depreciation was taken.
E)None of the above.
Q2) A retail building used in the business of a sole proprietor is sold on March 10, 2017, for $342,000. The building was acquired in 2007 for $400,000 and straight-line depreciation of $104,000 had been taken on the building. What is the maximum unrecaptured § 1250 gain from the disposition of this building?
A)$400,000
B)$322,000
C)$104,000
D)$26,000
E)None of the above
Q3) Describe the circumstances in which the potential § 1245 depreciation recapture is extinguished.
Page 20
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Chapter 18: Accounting Periods and Methods
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Q1) In 2016, T Corporation changed its tax year from ending each April 30th to ending each December 31st. The corporation earned $60,000 during the period May 1, 2016 through December 31, 2016. The annualized income for the short year is $90,000.
A)True
B)False
Q2) What incentives do the tax accounting rules provide for taxpayers to voluntarily change from an incorrect method of accounting that has reduced the company's tax liability in prior years?
Q3) John sold an apartment building for $600,000. His basis in the building was $360,000 and it was subject to $30,000 of depreciation recapture. John received $150,000 in the year of sale, the buyer assumed John's mortgage payable of $240,000, and the buyer gave John an 8% (the current Federal rate) note of $210,000 due in 5 years. The interest on the note was payable each June 30th, beginning in the year following the year of the sale. John incurred $30,000 of selling expenses which he paid in the year of sale. Compute John's installment sales gain that should be reported in the year of sale.
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21
Chapter 19: Deferred Compensation
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Q1) In 2017, Jindal Corporation paid compensation of $42,300 to the participants in a profit sharing plan and then contributed $12,800 to the plan. Jindal's deductible amount and any contribution carryover are as follows:
A)$0 deductible; $12,800 carryover.
B)$8,460 deductible; $4,340 carryover.
C)$10,575 deductible; $2,225 carryover.
D)$12,690 deductible; $110 carryover.
E)None of the above.
Q2) Zackie has five years of service completed as of February 5, 2017, which is his employment anniversary date. If his defined benefit plan [not a § 401(m) arrangement] uses the graded vesting rule, determine Zackie's nonforfeitable percentage.
A)40%
B)60%
C)80%
D)100%
E)None of the above
Q3) Group life insurance is considered a deferred compensation plan.
A)True
B)False
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Page 22
Chapter 20: Corporations and Partnerships
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Q1) Regarding the tax treatment of charitable contributions, corporations enjoy two major advantages over individuals. Elaborate.
Q2) The holding period to the partnership of property contributed by a partner includes the period during which the property was held by the contributing partner.
A)True
B)False
Q3) Like S corporations, partnerships serve as conduits for their owners.
A)True
B)False
Q4) Although the corporate income tax is progressive, the lower brackets are phased out at higher taxable income levels.
A)True
B)False
Q5) In computing the NOL of a corporation, the dividends received deduction cannot be claimed.
A)True
B)False
Q6) Recapture of depreciation on real property can be more severe.
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