Federal Income Taxation Exam Solutions
Course Introduction
This course provides an introduction to the fundamental principles of federal income taxation in the United States. It examines the Internal Revenue Code, Treasury regulations, and judicial decisions as they relate to the determination of gross income, deductions, exemptions, and credits for individuals and business entities. Key topics include the concept of income, tax accounting methods, the tax treatment of property transactions, and the policy considerations underlying current tax law. By analyzing real-life scenarios and engaging with problem-based assignments, students develop a foundational understanding of how federal income tax law applies to individuals and businesses, preparing them for advanced study or practice in tax-related fields.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 2014 17th Edition by Sally Jones
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18 Chapters
1724 Verified Questions
1724 Flashcards
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Chapter 1: Taxes and Taxing Jurisdictions
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85 Verified Questions
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Sample Questions
Q1) In some cases, the payer of a tax can shift the economic incidence of the tax to a third party.
A)True
B)False
Answer: True
Q2) Payment of a tax entitles the payer to a specific good or service from the government.
A)True
B)False
Answer: False
Q3) Mr. Bilboa is a citizen of Portugal. Which of the following statements is true?
A)The U.S.government has no jurisdiction to tax Mr.Bilboa because he is not a U.S.citizen.
B)The U.S.government has jurisdiction to tax Mr.Bilboa if he is a permanent resident of the United States.
C)The U.S.government has jurisdiction to tax Mr.Bilboa if he earns income from a business he operates in Florida.
D)Both B.and C.are true.
Answer: D
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3
Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) Which of the following statements about a proportionate income tax rate structure is false?
A)A theoretic justification for a proportionate rate is its superior potential for wealth redistribution.
B)Under a proportionate rate structure, the marginal rate equals the average rate.
C)Under a proportionate rate structure, the taxpayer with the least income pays the same percentage of income to the government as the taxpayer with the most income.
D)None of the above is false.
Answer: A
Q2) A dynamic forecast of the incremental revenue from a tax rate increase presumes that:
A)Taxpayers will not change their behavior because of the rate increase.
B)The tax base will increase by the same proportion as the rate increase.
C)The tax base will decrease by the same proportion as the rate increase.
D)The tax rate and the tax base are correlated.
Answer: D
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4
Chapter 3: Taxes As Transaction Costs
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Sample Questions
Q1) Ms. Leik has $50,000 in an investment paying 10% annual interest. Each year, she incurs a $600 cash expense relating to the investment. If Ms. Leik's marginal tax rate is 20%, which of the following statements is true?
A)Ms.Leik's annual after-tax cash flow from this investment is $3,520.
B)If the interest is taxable but the expense is not deductible, Ms.Leik's annual after-tax cash flow from the investment is $3,400.
C)If the interest is tax-exempt and the expense is not deductible, Ms.Leik's annual after-tax cash flow is $5,000.
D)None of the above is true.
Answer: B
Q2) Tax law uncertainty is the risk that the Internal Revenue Service will challenge a taxpayer's tax treatment on audit.
A)True
B)False
Answer: False
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Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) Corporations, LLCs, and partnerships are all taxable entities.
A)True
B)False
Q2) Mr. Hayes plans to pay $100,000 for one of three investment alternatives that have the same risk. The income from investment 1 would be taxed at Mr. Hayes' 25% regular tax rate, the income from investment 2 would be taxed at a 15% preferential rate, and the income from investment 3 is tax-exempt. The investments offer the following before-tax yields. Investment: 1 9.0%
Investment 2: 7.5%
Investment 3: 6.0% Which investment should Mr. Hayes select?
A)Investment 1
B)Investment 2
C)Investment 3
D)Mr.Hayes is neutral between investment 2 and investment 3.
Q3) Municipal bond investments bear less implicit tax than investments in taxable corporate bonds.
A)True
B)False
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Chapter 5: Tax Research
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75 Flashcards
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Sample Questions
Q1) The topical index of a commercial tax service is considered primary authority.
A)True
B)False
Q2) Novice tax researchers tend to exam less material in the course of a tax research project than experienced tax researchers.
A)True
B)False
Q3) A revenue ruling cannot be relied on as authority by any taxpayer other than the taxpayer for whom the ruling was issued.
A)True
B)False
Q4) Alex inherited an antique diamond bracelet from her grandmother. She is thinking of selling the bracelet to raise cash for her college tuition and wonders about the tax consequences of such a sale. If you were to research this question using a keyword search in an electronic library, what keywords would you use? Propose three distinct keyword searches.
Q5) Tax services are typically organized either topically or by Code section.
A)True
B)False
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Chapter 6: Taxable Income From Business Operations
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116 Verified Questions
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Sample Questions
Q1) Which of the following statements about methods of accounting is false?
A)The IRS has the right to determine if a taxpayer's method of accounting clearly reflects the taxpayer's income.
B)A taxpayer must request permission from the IRS to change its method of accounting for tax purposes.
C)A taxpayer engaged in more than one business can use a different method of accounting for each business.
D)Taxpayers must use the same method of accounting to compute taxable income as they use to compute financial statement income.
Q2) If an accrual basis taxpayer receives a prepayment of rent income, the receipt results in an unfavorable temporary book/tax difference.
A)True
B)False
Q3) Taxpayers that sell merchandise to their customers must use the accrual method to account for purchases and sales of merchandise.
A)True
B)False
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8
Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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106 Verified Questions
106 Flashcards
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Sample Questions
Q1) Lensa Inc. purchased machinery several years ago for $400,000. This year, book depreciation on the machinery was $40,000, MACRS depreciation was $35,720, and Lensa's marginal tax rate is 35%. Which of the following statements is true?
A)The book/tax difference in depreciation results in a $1,498 decrease in Lensa's deferred tax liabilities.
B)The book/tax difference in depreciation results in a $1,498 deferred tax asset.
C)The $4,280 difference between book and tax depreciation is unfavorable.
D)Both a.and c.are true.
Q2) The capitalized cost of tangible leasehold improvements is amortizable over the term of the lease.
A)True
B)False
Q3) Which of the following statements about the tax treatment of research and experimental expenditures is true?
A)The treatment violates the tax principle of conservatism.
B)The treatment creates a favorable book/tax difference.
C)The treatment minimizes the after-tax cost of the expenditures.
D)Both a.and c.are true.
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Chapter 8: Property Dispositions
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Sample Questions
Q1) This year, Ms Lucas sold investment land for $125,000 cash plus the purchaser's assumption of a $50,000 mortgage on the land. Ms. Lucas's tax basis in the land was $93,000. If any recognized gain is taxed at 15 percent, compute the after-tax cash flow from the sale.
A)$62,300
B)$69,700
C)$112,700
D)$162,700
Q2) Langtry Corporation recognized $798,000 ordinary income, $13,000 net Section 1231 loss, and $6,000 net capital loss this year. Langtry's taxable income is $785,000.
A)True
B)False
Q3) Which of the following is a Section 1231 asset?
A)Business inventory
B)Business accounts receivable
C)Supplies used in a business
D)None of the above is a Section 1231 asset
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Chapter 9: Nontaxable Exchanges
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Q1) Signo Inc.'s current year income statement includes a $21,000 gain realized on the exchange of an old business asset for a new business asset. If the exchange is nontaxable, Signo has a $21,000 favorable permanent book/tax difference.
A)True
B)False
Q2) Nixon Inc. transferred Asset A to an unrelated party in exchange for Asset Z and $15,750 cash. Nixon's tax basis in Asset A was $400,000, and Asset Z had a $510,000 appraised FMV. Which of the following statements is true?
A)If Asset A and Asset Z are like-kind property, Nixon recognizes a $15,750 gain and takes a $400,000 basis in Asset Z.
B)If Asset A and Asset Z are not like-kind property, Nixon recognizes a $110,000 gain and takes a $510,000 basis in Asset Z.
C)If Asset A and Asset Z are like-kind property, Nixon recognizes no gain and takes a $400,000 basis in Asset Z.
D)If Asset A and Asset Z are like-kind property, Nixon recognizes a $15,750 gain and takes a $415,750 basis in Asset Z.
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Chapter 10: Sole Proprietorships, Partnerships, Llcs, and S
Corporations
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Sample Questions
Q1) Drake Partnership earned a net profit of $400,000. Four partners share profits and losses equally. No cash was distributed. The partners will report taxable income from the partnership on their personal income tax returns for the year.
A)True
B)False
Q2) A partnership is an unincorporated business activity owned by at least two taxpayers.
A)True B)False
Q3) Which of the following statements regarding the home office deduction is true?
A)In order to qualify for the deduction, a portion of the taxpayer's home must be used regularly and exclusively to meet with clients or customers.
B)A home office deduction is not allowed for using the home office for administrative or management activities only.
C)The home office deduction is limited to the taxable income of the business before the deduction.
D)A depreciation deduction is not allowed for a home office.
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Page 12
Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) Sonic Corporation has a 35% marginal tax rate and received $10,000 of dividends from Roller, Inc., a U.S. corporation in which Sonic owns less than 2% of the outstanding stock. Sonic's effective tax rate on the Roller dividend is:
A)35%
B)24.5%
C)10.5%
D)None of the above
Q2) The corporate characteristic of limited liability is more important to the shareholders than the characteristic of centralized management.
A)True
B)False
Q3) Which of the following statements about the calculation of alternative minimum taxable income is true?
A)Excess percentage depletion is a positive adjustment to AMTI.
B)The AMT net operating loss can reduce AMTI to zero.
C)The AMTI exemption for all corporations is $40,000.
D)The minimum tax credit can be carried back two years.
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Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) The revenue agent who audited the Form 1120 filed by LCW Inc. recharacterized $125,000 of the salary paid to Ms. Lewis' (LCW's president and controlling shareholder) as a constructive dividend. LCW's marginal tax rate is 35%, and Ms. Lewis' marginal tax rate is 33%. Which of the following is not a consequence of the recharacterization?
A)LCW's taxable income will increase.
B)Ms.Lewis' taxable income will increase.
C)Ms.Lewis' payroll tax liability will decrease.
D)Ms.Lewis' income tax liability will decrease.
Q2) Which of the following is NOT one of the characteristics of a constructive dividend?
A)Payment between a corporation and a shareholder
B)Original payment treated as deductible by the corporation
C)Original payment treated as made to the shareholder in some capacity other than as an owner of the corporation
D)All of the above are common characteristics of constructive dividends.
Q3) The accumulated earnings tax is assessed at the highest individual marginal tax rate on ordinary income.
A)True
B)False
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Page 14
Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) Albany, Inc. does business in states C andD. State C uses an apportionment formula that double-weights the sales factor; state D apportions income using an equally-weighted three-factor formula. Albany's before tax income is $3,000,000, and its sales, payroll, and property factors are as follows.
A)State C, $1,100,000; State D, $1,800,000
B)State C, $1,100,000; State D, $1,900,000
C)State C, $1,200,000; State D, $1,800,000
D)State C, $1,200,000; State D, $1,900,000
Q2) Transfer pricing issues arise:
A)When tangible goods are transferred between related parties operating in different taxing jurisdictions.
B)When rights to use intangible assets, such as patents or trademarks, are licensed between related parties operating in different taxing jurisdictions.
C)Both of the above situations can create transfer pricing issues.
D)Neither of the above situations creates transfer pricing issues.
Q3) All states assessing an income tax use the same formula for apportionment purposes.
A)True
B)False
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Page 15
Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Which of the following statements concerning extensions of time to file an individual tax return is false?
A)The extension of time to file does not extend the time for payment of any tax due.
B)An individual may receive an automatic extension of the filing date without providing any explanation to the IRS.
C)The extended due date of a calendar-year individual tax return is October 15 of the following year.
D)An extension request must be filed before the end of the taxable year.
Q2) Mr. and Mrs. Warren's AGI last year was $90,300, and their total tax was $13,988. This year, the couple's total tax is $14,700. Unless the Warrens paid at least $13,988 in the form of withholding and quarterly estimated payments, they will incur an underpayment penalty this year.
The Warrens will not incur a penalty if they paid at least $13,230 (90% of current year tax).
A)True
B)False
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Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) Six years ago, HOPCO granted Ms. Cardena a nonqualified option to purchase 1,000 shares of HOPCO stock at $12 per share. On date of grant, the market price was $10 per share. This year, Ms. Cardena exercised the option when the market price was $33 per share. Compute HOPCO's deduction resulting from the exercise.
A)$0
B)$12,000
C)$23,000
D)None of the above.
Q2) Mr. Thano, age 47, withdrew $22,000 from his employer-sponsored qualified retirement plan to pay for his daughter's wedding. Compute the tax cost of the withdrawal if Mr. Thano has a 28% marginal tax rate on ordinary income.
A)$2,200
B)$6,160
C)$8,360
D)$11,000
Q3) Unreimbursed employment-related business expenses are a miscellaneous itemized deduction.
A)True
B)False
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Page 17
Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) Emil Nelson paid $174,500 for an annuity that will pay him $1,300 per month for life. Based on Emil's age, his expected return is $405,813. This year, Emil received 12 payments totaling $15,600. How much of this total is taxable income?
A)$0
B)$5,300
C)$6,708
D)None of the above.
Q2) Gain on sale of qualified small business stock is taxed at a maximum rate of 15%.
A)True
B)False
Q3) Mr. McCann died this year. During his lifetime, he made taxable gifts significantly in excess of his lifetime exclusion. Mr. McCann's taxable estate was $21.9 million. Compute the estate tax on this estate.
A)$8.760 million
B)$6.660 million
C)$7.665 million
D)The facts are insufficient to compute the estate tax.
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Chapter 17: Tax Consequences of Personal Activities
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Q1) Mr. and Mrs. Blake suffered two casualty losses this year. Mr. Blake's wallet containing $1,300 cash was stolen, and their uninsured sailboat (basis $67,000; FMV $50,000) sank after colliding with a reef. Compute the Blakes' itemized deduction for casualty losses if their AGI was $112,200.
A)$40,080
B)$56,080
C)$39,980
D)None of the above.
Q2) Helen makes quilts and sells them at the regional county fairs. This year, she earned $950 from quilt sales and spent $3,300 on supplies and travel relating to her quilting activity. If the IRS determines that this activity is a hobby instead of a business, Helen can't deduct her $2,350 net loss.
A)True B)False
Q3) Recipients of the Nobel Peace Prize must include the prize in gross income. A)True B)False
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Page 19
Chapter 18: The Tax Compliance Process a Present Value of
$1 B Present Value of Annuity of $1 C 2013 Income Tax Rates
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Q1) Mr. and Mrs. Clyde were married for 21 years before Mrs. Clyde divorced her husband in 2011. This year, the IRS determined that the Clydes underpaid their 2011 tax by $19,650. In which case would Mrs. Clyde be relieved of liability for the underpayment under the innocent spouse rule?
A)Mrs.Clyde did not read through the Form 1040 before she signed it.
B)Mrs.Clyde remarried this year and is now Mrs.Novak.
C)Mr.Clyde was the sole income earner during the entire marriage.
D)None of the above.
Q2) Which of the following statements about a tax deficiency is true?
A)If a taxpayer is assessed a deficiency, the government will charge interest on the deficiency regardless of the reason for the deficiency.
B)Individuals who pay interest on a tax deficiency can deduct it as an itemized deduction.
C)Individuals who pay interest on a tax deficiency can deduct it as a business expense.
D)Statements A.and B.are both true.
Q3) Only the government may appeal a tax case to the U.S. Supreme Court.
A)True
B)False
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