Federal Income Taxation Exam Review
Course Introduction
Federal Income Taxation provides a comprehensive overview of the principles and laws governing the federal income tax system in the United States. The course examines the statutory framework of the Internal Revenue Code, focusing on concepts such as gross income, deductions, exclusions, and tax credits. Students explore the taxation of individuals, corporations, partnerships, and other entities, and analyze how tax policy influences economic decisions. Real-world examples and practical applications help students develop an understanding of tax compliance, planning, and ethical considerations relevant to federal income taxation.
Recommended Textbook
South Western Federal Taxation 2012 Comprehensive by William H. Hoffman
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Page 2
Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) For the negligence penalty to apply,the underpayment must be caused by intentional disregard of rules and regulations with intent to defraud.
A)True
B)False
Answer: False
Q2) 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
B)False
Answer: True
Q3) Allowing a domestic production activities deduction for certain manufacturing income can be justified:
A) As mitigating the effect of the annual accounting period concept.
B) As promoting administrative feasibility.
C) By economic considerations.
D) Based on the wherewithal to pay concept.
E) None of the above.
Answer: C
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Chapter 2: Working With the Tax Law
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Q1) Which is presently not a major tax service?
A) Standard Federal Tax Reporter.
B) Federal Taxes.
C) United States Tax Reporter.
D) Tax Management Portfolios.
E) All of the above are major tax services.
Answer: B
Q2) 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
Q3) Before a tax bill can become law,it must be approved by the President.
A)True
B)False
Answer: False
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Chapter 3: Tax Determination: Personal and Dependency
Exemptions: an Overview of Property Transactions
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Q1) During the current year,Doris received a large gift from her parents and a sizeable inheritance from an uncle.She also paid premiums on an insurance policy on her life.Doris is confused because she cannot find any place on Form 1040 to report these items.Explain.
Answer: Gifts and inheritances are exclusions from gross income.Like most exclusions,they are not reported on Form 1040.Premiums on a personal life insurance policy are nondeductible.Nondeductible items,such as these premiums,are not reported on Form 1040
Q2) Arnold is married to Sybil,who abandoned him in 2009.He has not seen or communicated with her since April of that year.He maintains a household in which their son,Evans,lives.Evans is age 25 and earns over $20,000 each year.For tax year 2011,Arnold's filing status is:
A) Married, filing jointly.
B) Married, filing separately.
C) Head of household.
D) Surviving spouse.
E) Single.
Answer: B
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) On October 1,2011,Bob,a cash basis taxpayer,gave Dave common stock that paid a dividend of $1,000 on December 15,2011.On November 15,2011,the corporation declared the dividend payable to shareholders of record as of November 22,2011.The corporation has paid the $1,000 dividend once each year for the past ten years,during which Bob owned the stock.When Dave collected the dividend on December 15,2011:
A) Bob must include all of the dividend in his gross income.
B) Dave must include all of the dividend in his gross income.
C) Bob must report $750 of dividend income, and Dave must report $250 of dividend income.
D) Bob must report $250 of dividend income, and Dave must report $750 of dividend income.
E) None of the above is correct.
Q2) An accrual basis taxpayer who owns and operates a professional basketball team is allowed to allocate income from season ticket sales on the basis of the number of games played during the year.
A)True B)False
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Page 6
Chapter 5: Gross Income: Exclusions
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Q1) What Federal income tax benefits are provided for college students?
Q2) Sonja is a United States citizen who has worked in Spain for the past 10 months.She received $5,000 a month as compensation.Her employer has offered to extend Sonja's contract to work in Spain for another 5 months at the same rate of pay.If she rejects the offer,she can return to the United States and receive the same salary.While working in Spain,she is subject to the Spain income tax,which is approximately 11% of her gross pay.The marginal tax rate on her income taxed in the United States is 25%.Compare Sonja's after-tax income assuming she remains in Spain with her after-tax income if she returns to the United States.
Q3) The exclusion for health insurance premiums paid by the employer applies to:
A) Only current employees.
B) Only current employees and their spouses and children.
C) Only current and retired former employees.
D) Present employees, retired former employees, and their spouses and children.
E) None of the above.
Q4) Workers' compensation benefits are included in gross income because the payments replace wages the individual would have otherwise received.
A)True
B)False
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Chapter 6: Deductions and Losses: in General
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Q1) Legal expenses incurred in connection with rental property are deductions from AGI.
A)True
B)False
Q2) In preparing his 2011 Federal income tax return,Sam,who is not married and using single filing status,incorrectly claimed alimony payments of $12,000 as an itemized deduction (rather than as a deduction for AGI).Sam's AGI is $60,000 and itemized deductions (which consist of the alimony,property taxes,and mortgage interest)are $20,000.Which of the following statements is correct?
A) The error will result in taxable income being overstated.
B) The error will result in taxable income being understated.
C) The error could result in either taxable income being overstated or understated.
D) The error will have no effect on taxable income.
E) None of the above.
Q3) Under certain circumstances,a cash method taxpayer must treat prepayments the same as an accrual method taxpayer.
A)True
B)False
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) If the amount of the insurance recovery for a theft of business property is greater than the asset's fair market value but less than it's adjusted basis,a gain is recognized.
A)True
B)False
Q2) Five years ago,Tom loaned his son John $20,000 to start a business.A note was executed with an interest rate of 8%,which is the Federal rate.The note required monthly payments of the interest with the $20,000 due at the end of ten years.John always made the interest payments until last year.During the current year,John notified his father that he was bankrupt and would not be able to repay the $20,000 or the accrued interest of $1,800.Tom is a cash basis taxpayer whose only income is salary and interest income.The proper treatment for the nonpayment of the note is:
A) No deduction.
B) $3,000 deduction.
C) $20,000 deduction.
D) $21,800 deduction.
E) None of the above.
Q3) Discuss the treatment of casualty and theft losses incurred with property in a transaction entered into for profit.
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Q1) If 150% declining-balance is used,there is no straight-line switchover.
A)True
B)False
Q2) The cost of a covenant not to complete for five years incurred in connection with the acquisition of a business is amortized over 5 years.
A)True
B)False
Q3) Howard's business is raising and harvesting peaches.On March 10,2011,Howard purchased 10,000 new peach trees at a cost of $60,000.Howard does not elect to expense assets under § 179.Determine the cost recovery deduction for 2011.
A) $0.
B) $2,500.
C) $10,000.
D) $60,000.
E) None of the above.
Q4) Motel buildings are classified as residential rental real estate.
A)True
B)False
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Q5) Discuss the reason for the inclusion amount with respect to leased automobiles.
Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) Employees who render an adequate accounting to the employer and are fully reimbursed will shift the 50% cutback adjustment to their employer.
A)True
B)False
Q2) The § 222 deduction for tuition and related expenses is available:
A) Only if the taxpayer itemizes deductions from AGI.
B) To deduct that portion of the tuition in excess of that allowed under the lifetime learning credit.
C) To cover the tuition of a son who does not qualify as taxpayer's dependent.
D) Only if job related.
E) None of the above.
Q3) If a taxpayer does not own a home but rents an apartment,the office in the home deduction is not available.
A)True
B)False
Q4) For tax purposes,"travel" is a broader classification than "transportation."
A)True
B)False
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) In 2011,Dena traveled 545 miles for specialized medical treatment that was not available in her hometown.She paid $80 for meals during the trip,$125 for a hotel room on Tuesday night,and $15 in parking fees.She did not keep records of other out-of-pocket costs for transportation.Dena can include $235 in computing her medical expenses.
A)True
B)False
Q2) Mindy paid an appraiser to determine how much a capital improvement made for medical reasons increased the value of her personal residence.The appraisal fee qualifies as a deductible medical expense.
A)True
B)False
Q3) Albert is the sole proprietor of a grocery store.He cannot deduct real property taxes on his store building and state income taxes related to his net income from the grocery store as a business deduction.
A)True
B)False
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Chapter 11: Investor Losses
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Q1) Joyce owns an activity (not real estate)in which she participates for 100 hours a year; her husband participates for 450 hours.Joyce qualifies as a material participant.
A)True
B)False
Q2) Rick,a computer consultant,owns a separate business (not real estate)in which he participates.He has one employee who works part-time in the business.
A) If Rick participates for 500 hours and the employee participates for 620 hours during the year, Rick qualifies as a material participant.
B) If Rick participates for 550 hours and the employee participates for 2,000 hours during the year, Rick qualifies as a material participant.
C) If Rick participates for 120 hours and the employee participates for 120 hours during the year, Rick does not qualify as a material participant.
D) If Rick participates for 95 hours and the employee participates for 5 hours during the year, Rick probably does not qualify as a material participant.
E) None of the above.
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Chapter 12: Tax Credits and Payments
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Questions
Q1) The low-income housing credit is available to low-income tenants who reside in qualifying low-income housing.
A)True
B)False
Q2) The tax benefits resulting from tax credits and tax deductions are affected by the tax rate bracket of the taxpayer.
A)True
B)False
Q3) Explain the purpose of the disabled access credit and describe the general characteristics of its computation.
Q4) Which,if any,of the following correctly describes the earned income credit?
A) Would be available regardless of the amount of the taxpayer's adjusted gross income.
B) Not available to a surviving spouse.
C) A taxpayer must have a qualifying child to take advantage of the credit.
D) Is a refundable credit.
E) None of the above.
Q5) Discuss the treatment of unused general business credits.
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Chapter 13: Property Transactions
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Q1) Under what circumstance is there recognition of some or all of the realized gain associated with the giving of boot by the taxpayer in a like-kind exchange?
Q2) Sandy and Greta form Tan,Inc.by transferring the following assets to the corporation in exchange for 1,000 shares of stock each. Sandy: Cash of $200,000 Greta: Land (worth $200,000; adjusted basis of $75,000). How much gain must Tan recognize on the receipt of these assets?
Q3) Hilary receives $10,000 for a 13-foot wide utility easement along one of the boundaries to her property.The easement provides that no structure can be built on that portion of the property.Her adjusted basis for the property is $200,000 and the easement covers 15% of the total acreage.Determine the effect of the $10,000 payment on Hilary's gross income and her basis for the property.
Q4) For gifts made after 1976,when will part of the gift tax paid by the donor be added to the donee's basis?
Q5) Taxpayer's principal residence is destroyed by a tornado.Taxpayer is single and his realized gain is $400,000.Is it possible for the taxpayer's recognized gain to be $0?
Q6) For disallowed losses on related-party transactions,who has the right of offset?
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Page 15
Chapter 14: Property Transactions: Capital Gains and Losses
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Q1) As a general rule,the sale or exchange of an option to buy or sell property results in capital gain or loss if the property subject to the option is (or would be)a capital asset in the hands of the option holder.
A)True B)False
Q2) Sam operates a retail hardware store as a sole proprietorship.Which of the following items are capital assets in the hands of Sam?
A) The store's counters and display cases.
B) A portable workbench that has been in the store's inventory for over a year.
C) The store building that is an asset of the sole proprietorship.
D) An interest-bearing savings account used to keep the store's excess cash.
E) None of the above.
Q3) Casualty gains and losses from nonpersonal use assets are netted against casualty gains and losses from personal use assets to determine the net casualty gain or loss. A)True B)False
Q4) What characteristics must the seller of a patent have in order to be classified as a holder?
Page 16
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Chapter 15: Alternative Minimum Tax
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Q1) Income from some long-term contracts can be reported using the completed contract method for regular income tax purposes,but the percentage of completion method is required for AMT purposes for all long-term contracts.
A)True
B)False
Q2) What itemized deductions are allowed for both regular income tax purposes and for AMT purposes?
Q3) If a taxpayer exercises an ISO and disposes of the option in the same tax year,are any AMT adjustments required?
Q4) Moore incurred circulation expenditures of $300,000 in 2011 and deducted that amount for regular income tax purposes.Moore has a $100,000 negative AMT adjustment for 2012,for 2013,and for 2014.
A)True
B)False
Q5) In determining the amount of the AMT adjustments,discuss the difference in the treatment of a building placed in service after 1986 and before January 1,1999 and a building placed in service after December 31,1998.
Q6) Can AMT adjustments and preferences be both positive and negative?
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Chapter 16: Accounting Periods and Methods
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Q1) In the case of a sale reported under the installment method,no gain is reported until the seller has recovered the entire cost of the property sold.
A)True
B)False
Q2) In 2011,Kathy sold an apartment building to her 100 percent controlled corporation,Kathy,Inc.The apartment building cost $500,000 and the balance in the accumulated depreciation account was $400,000.Kathy,Inc.paid $100,000 in the year of sale and gave Kathy a note for $900,000 plus adequate interest due in 2013.
A) Kathy can use the installment method only if tax avoidance was not a principal purpose of the transaction.
B) Kathy generally cannot report the gain by the installment method.
C) If Kathy owned only 40 percent rather than 100 percent of the corporation, she could use the installment method.
D) Only a. and b. are correct.
E) a., b., and c. are correct.
Q3) 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?
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Page 18
Chapter 17: Corporations: Introduction and Operating Rules
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Q1) Copper Corporation owns stock in Bronze Corporation and has net operating income of $900,000 for the year.Bronze Corporation pays Copper a dividend of $150,000.What amount of dividends received deduction may Copper claim if it owns 65% of Bronze stock (assuming Copper's dividends received deduction is not limited by its taxable income)?
A) $97,500.
B) $105,000.
C) $120,000.
D) $150,000.
E) None of the above.
Q2) The passive loss rules apply to closely held C corporations and to personal service corporations but not to S corporations.
A)True
B)False
Q3) Schedule M-2 is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year.
A)True
B)False
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19
Chapter 18: Corporations: Organization and Capital Structure
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Q1) Lark City donates land worth $300,000 and cash of $100,000 to Orange Corporation as an inducement to locate in the city.Four months later,Orange purchases additional land and a building at a cost of $500,000 and moves its operations to Lark City.Ann,the sole shareholder,contributes equipment (basis of $70,000 and fair market value of $200,000)to help Orange in its new operations.What are the tax consequences of these transfers to Orange Corporation?
Q2) In order to induce Yellow Corporation to build a new manufacturing facility in Knoxville,Tennessee,the city donates land (fair market value of $400,000)and cash of $100,000 to the corporation.Several months after the donation,Yellow Corporation spends $450,000 (which includes the $100,000 received from Knoxville)on the construction of a new plant located on the donated land.
A) Yellow recognizes income of $100,000 as to the donation.
B) Yellow has a zero basis in the land and a basis of $450,000 in the plant.
C) Yellow recognizes income of $500,000 as to the donation.
D) Yellow has a zero basis in the land and a basis of $350,000 in the plant.
E) None of the above.
Q3) Issues relating to basis arise when a taxpayer is involved in a § 351 transaction.Describe the underlying rules,and the purpose they serve.
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Chapter 19: Corporations: Distributions Not in Complete
Liquidation
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Q1) When is a redemption to pay death taxes under § 303 most advantageous?
Q2) In a redemption to pay death taxes,stock in corporations in which the decedent held a 20% or more interest is treated as stock in a single corporation for purposes of determining whether the value of stock owned by the decedent exceeds 35% of the value of the decedent's adjusted gross estate.
A)True
B)False
Q3) Dividends taxed as ordinary income are considered investment income for purposes of the investment interest expense limitation.
A)True B)False
Q4) A corporate shareholder that receives a constructive dividend cannot apply a dividends received deduction to the distribution.
A)True B)False
Q5) An increase in the LIFO recapture amount must be added to taxable income to determine E & P.
A)True B)False
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) In the current year,Dove Corporation (E & P of $1 million)distributes all of its property in a complete liquidation.Alexandra,a shareholder,receives land having a fair market value of $200,000.Dove Corporation had purchased the land as an investment three years ago for $150,000,and the land was distributed subject to a $100,000 liability.Alexandra took the land subject to the $100,000 liability.What is Alexandra's basis in the land?
A) $50,000.
B) $100,000.
C) $150,000.
D) $200,000.
E) None of the above.
Q2) One difference between the tax treatment accorded nonliquidating and liquidating distributions is with respect to the recognition of losses by the distributing corporation.As a general rule,a corporation recognizes losses on liquidating distributions of depreciated property (fair market value less than basis)but not on nonliquidating distributions of such property.
A)True
B)False
Q3) Describe the requirements for and tax consequences of a § 338 election.
Page 22
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Chapter 21: Partnerships
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Q1) Cassandra is a 10% limited partner in C&C,Ltd.Her basis in the interest is $60,000 before loss allocations,including her $30,000 share of the partnership's nonrecourse debt.(This debt is not qualified nonrecourse financing.)Cassandra is also a 10% limited partner in RSTU,in which her basis is $30,000.Cassandra is allocated an $80,000 loss from C&C,and $20,000 of income from RSTU.How much of the loss from C&C may Cassandra deduct? Under what Code provisions are the remaining losses suspended?
Q2) In a limited partnership,all partners are protected from debts of the partnership. A)True
B)False
Q3) The LMO Partnership distributed $30,000 cash to Emma in a proportionate,nonliquidating distribution.Emma's basis in her partnership interest was $25,000 immediately before the distribution.As a result of the distribution,Emma's basis is reduced to $0 and she recognizes a $5,000 gain.
A)True
B)False
Q4) Meagan is a 40% general partner in the calendar year,cash basis MKK Partnership.The partnership received $100,000 income from services and paid the following other amounts:
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Page 23
Chapter 22: S Corporations
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Q1) Discuss the two methods of allocating S items to shareholders.
Q2) On January 2,2010,David loans his S corporation $10,000,and by the end of 2010 David's stock basis is zero and the basis in his note has been reduced to $8,000.During 2011,the company's operating income is $10,000.The company also makes distributions to David of $11,000.Which statement is correct?
A) $1,000 LTCG.
B) $3,000 LTCG.
C) $11,000 LTCG.
D) Loan basis is $10,000.
E) None of the above statements is correct.
Q3) On January 1,Bobby and Alice own equally all of the stock of an electing S corporation called Prairie Dirt Delight.The dirt company has a $60,000 loss for a non-leap year.On the 200th day of the year,Bobby sells his one-half of the stock to his son,Saul.How much of the $60,000 loss,if any,is allocated to Bobby?
A) $0.
B) $13,562.
C) $16,438.
D) $32,877.
E) None of the above.
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Page 24
Chapter 23: Exempt Entities
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Q1) Engaging in a prohibited transaction can result in an exempt organization being subject to Federal income tax,but cannot cause it to lose its exempt status unless the exempt organization repeats the prohibited transaction.
A)True
B)False
Q2) While the major objective of the Federal income tax law is to raise revenue,social considerations and economic objectives also affect the tax law.
A)True
B)False
Q3) What are the excise taxes imposed on private foundations,and why are they imposed?
Q4) To maintain exempt status,an organization must do which of the following:
A) Satisfy only an organizational test.
B) Satisfy only an operational test.
C) Satisfy both an organizational test and an operational test.
D) Satisfy a financial test.
E) Once exempt status is granted, it will continue regardless of whether the organizational test and the operational test are satisfied.
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Chapter 24: Multistate Corporate Taxation
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Q1) In determining a corporation's taxable income for state income tax purposes,which of the following does not constitute a subtraction from Federal income?
A) Interest on U.S. obligations.
B) Expenses that are directly or indirectly related to state and municipal interest that is taxable for state purposes.
C) The amount by which the Federal deduction for depreciation exceeds the depreciation deduction permitted for state tax purposes.
D) The amount by which the state loss from the disposal of assets exceeds the Federal loss from such disposal.
Q2) Federal taxable income is used as the starting point in computing the state's income tax base,but numerous state adjustments or modifications generally are required to:
A) Reflect differences between state and Federal tax statutes.
B) Remove income that a state is constitutionally prohibited from taxing.
C) Allow for all of the states to use the same definition of taxable income.
D) a. and b.
Q3) Identify some state/local income tax issues facing pass-through entities such as S corporations,partnerships,and LLCs.
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26
Chapter 25: Taxation of International Transactions
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Q1) U.S.individuals who receive dividends from foreign corporations may claim the deemed-paid foreign tax credit related to such dividends.
A)True
B)False
Q2) Which of the following statements concerning the sourcing of income from inventory produced by the taxpayer in the U.S.and sold outside the U.S.is true?
A) If title passes on the inventory outside the U.S., all of the inventory income is foreign source.
B) Because the inventory is manufactured in the U.S., all of the inventory income is U.S. source.
C) The taxpayer may use the 50-50 method to source one-half the income based on title passage and one-half the income based on location of production assets.
D) The taxpayer may use the 50-50 method to source one-half the income based on title passage and one-half the income based on where the sale negotiation takes place.
Q3) With respect to income generated by non-U.S.persons,does the U.S.apply a "worldwide" or a "territorial" approach.Be specific.
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Chapter 26: Tax Practice and Ethics
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Q1) The IRS processes about ____________________ million individual tax returns every year.
Q2) The taxpayer can use a(n)____________________ to pay off a deficiency over a longer period of time,if the IRS believes that this will facilitate the tax collection process.
Q3) Carole,a CPA,feels that she cannot act as an aggressive advocate for tax clients in today's environment.What aspects of the ethical conduct of a tax practice might have influenced Carole's attitude?
Q4) The usual three-year statute of limitations on additional tax assessments applies in the following situation(s).
A) No return at all is filed.
B) An investment in a marketable security is worthless.
C) Taxpayer inadvertently omits an amount of gross income equal to 30% of the gross income stated on the return.
D) Taxpayer discovers an inadvertent overstatement of deductions equal to 30% of gross income.
Q5) A tax preparer can incur a penalty if the client's return includes an unreasonable or ___________________ tax return position that understates the tax liability.
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Chapter 27: The Federal Gift and Estate Taxes
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169 Verified Questions
169 Flashcards
Source URL: https://quizplus.com/quiz/71485
Sample Questions
Q1) The U.S.has death tax conventions (i.e.,treaties)with most of the countries of the world.
A)True
B)False
Q2) The current $5 million exemption equivalent applies to both the Federal estate and gift taxes.
A)True
B)False
Q3) Ray purchases U.S.savings bonds which he lists as "Ray and Donna" as co-owners.Donna is Ray's daughter.Donna predeceases Ray.No gift or estate tax consequences result from this situation.
A)True
B)False
Q4) Lyle and Beatrice are brother and sister.Using his funds,Lyle purchases land,listing title as: "Lyle and Beatrice,joint tenants with right of survivorship." If Lyle dies first,all of the land is included in his gross estate.
A)True
B)False
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Chapter 28: Income Taxation of Trusts and Estates
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140 Verified Questions
140 Flashcards
Source URL: https://quizplus.com/quiz/71484
Sample Questions
Q1) Entity accounting income is controlled by the terms of the ____________________ for an estate or the ____________________ for a trust.
Q2) This year,the Huang Trust distributed all of its accounting income and $1,000 from corpus.Huang's taxable income for the year is:
A) $0.
B) ($100).
C) ($300).
D) ($1,000).
Q3) A Form 1041 must be filed by an estate that recognizes $____________________ or more gross income for the tax year.
Q4) Every ____________________ trust is allowed a $300 personal exemption.
Q5) Income beneficiary Molly wants to receive all of the municipal bond interest income of the Brenner Trust.A ____________________ of this sort must be supported by a non-tax economic effect.
Q6) A complex trust pays tax on the income that it retains and adds to corpus.
A)True B)False
Q7) The IRS encourages ____________________ filing for Forms 1041.
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