Federal Income Taxation
Exam Solutions
Course Introduction
Federal Income Taxation provides a comprehensive examination of the principles and regulations governing the federal income tax system in the United States. The course introduces students to the structure of the Internal Revenue Code, concepts of gross income, deductions, credits, capital gains and losses, and the taxation of individuals, businesses, and entities. Emphasis is placed on applying statutory and case law to real-world scenarios, developing skills in tax research, analysis, and compliance. This course serves as an essential foundation for students interested in accounting, law, and public policy, equipping them with the knowledge needed to understand and navigate the complexities of federal taxation.
Recommended Textbook
South Western Federal Taxation 2013 Individual Income Taxes 36th Edition by William H
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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155 Verified Questions
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Sample Questions
Q1) In preparing a tax return,all questions on the return must be answered.
A)True
B)False
Answer: False
Q2) State income taxes generally can be characterized by:
A) A different date for filing than the Federal income tax.
B) No provision for withholding procedures.
C) Allowance of a deduction for Federal income taxes paid.
D) Applying only to individuals and not applying to corporations.
E) None of the above.
Answer: E
Q3) The tax law allows an income tax deduction for state and local income taxes.Explain why.
Answer: The deduction for state and local income taxes can be justified on the grounds that it mitigates the double tax imposed on the same income.
Q4) An inheritance tax is a tax on a decedent's right to pass property at death.
A)True
B)False
Answer: False
3
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Chapter 2: Working With the Tax Law
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Sample Questions
Q1) The following citation is correct: Larry G. Mitchell, 131 T.C. 215 (2008).
A)True
B)False
Answer: True
Q2) Electronic databases are most frequently searched by the keyword approach.
A)True
B)False Answer: True
Q3) The IRS issues an acquiescence or nonacquiescence only for regular Tax Court decisions.
A)True
B)False Answer: False
Q4) There are 11 geographic U.S.Circuit Court of Appeals.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Tax Formula and Tax Determination: an
Overview of Property Transactions
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153 Flashcards
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Sample Questions
Q1) Married taxpayers who file separately cannot later change to a joint return.
A)True
B)False
Answer: False
Q2) Kyle,whose wife died in December 2009,filed a joint tax return for 2009.He did not remarry,but has continued to maintain his home in which his two dependent children live.What is Kyle's filing status as to 2012?
A) Head of household.
B) Surviving spouse.
C) Single.
D) Married filing separately.
E) None of the above.
Answer: A
Q3) 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
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Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) On January 1,2012,an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 36 months.The amount received for the contract was $2,400.The taxpayer should report $1,600 of income in 2013.
A)True
B)False
Q2) Rachel,who is in the 35% marginal tax bracket,is considering purchasing an annuity that will pay her $10,000 per year for the remainder of her life.Her life expectancy is 15 years.The cost of the annuity is $97,120,and the cost is calculated to yield her an expected 6% return on her investment.As an alternative,Rachel could place the $97,120 in a savings account yielding 6% and she could withdraw $10,000 each year for 15 years (reducing the value of the account to zero at the end of 15 years).How might the tax laws applicable to annuities affect Rachel's decision?
Q3) George and Erin are divorced,and George is required to pay Erin $20,000 of alimony each year.George earns $75,000 a year.Erin is not required to include the alimony payments in gross income because George earned the income and therefore he should pay the tax on the income.
A)True
B)False
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Chapter 5: Gross Income: Exclusions
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Sample Questions
Q1) Gull Corporation was undergoing reorganization under the bankruptcy laws.The shareholders,who had made loans of $300,000 to the corporation,agreed to accept additional stock with a value of $200,000 instead of repayment on the debt.The Old Line Insurance Company,which had a $400,000 mortgage on the building,agreed to reduce the principal to $250,000.A trade creditor with a receivable of $150,000 from the company agreed to accept $70,000 in full payment for the debt incurred to purchase goods that were still on hand.Finally,the company transferred some equipment with an adjusted basis of $90,000 in satisfaction of a liability for $120,000.Compute the corporation's gross income and other adjustments necessary as a result of the above transactions.
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) Ashley received a scholarship to be used as follows: tuition $6,000; room and board
$9,000; and books and laboratory supplies $2,000.Ashley is required to include only $9,000 in her gross income.
A)True
B)False
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Page 7
Chapter 6: Deductions and Losses: in General
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Sample Questions
Q1) Max opened his dental practice (a sole proprietorship)in March 2012.At the end of the year,he has unpaid accounts receivable of $62,000 and no unpaid accounts payable.Should Max use the accrual method or the cash method for his dental practice?
Q2) Which of the following is correct?
A) A personal casualty loss is classified as a deduction from AGI.
B) Real estate taxes on a taxpayer's personal residence are classified as deductions from AGI.
C) An expense associated with rental property is classified as a deduction from AGI.
D) Only a. and b. are correct.
E) a., b., and c., are correct.
Q3) The Code defines what constitutes a trade or business.
A)True
B)False
Q4) All employment related expenses are classified as deductions for AGI.
A)True
B)False
Q5) In distinguishing whether an activity is a hobby or a trade or business,discuss the presumptive rule.
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) If qualified production activities income (QPAI)cannot be used in the calculation of the domestic production activities deduction in 2012 because of the taxable income limitation,the product of the amount not allowed multiplied by 9% can be carried over for 5 years.
A)True
B)False
Q2) A loss from a worthless security is always treated as a short-term capital loss.
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) Depreciation on a building used for research may be a research and experimental expense.
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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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) Howard's business is raising and harvesting peaches.On March 10,2012,Howard purchased 10,000 new peach trees at a cost of $60,000.Howard does not elect to expense assets under § 179.If eligible,Howard takes additional first-year depreciation.Determine the cost recovery deduction for 2012.
A) $0.
B) $3,000.
C) $31,500.
D) $60,000.
E) None of the above.
Q2) The § 179 limit for a sports utility vehicle with a GVW of 7,000 pounds used for the production of income is $25,000.
A)True
B)False
Q3) The concept of depreciation assumes that the asset has a determinable useful life. A)True
B)False
Q4) Discuss the effect on the cost recovery method of a taxpayer election if the uniform capitalization rules apply to a farming business.
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) An education expense deduction is not allowed if the education results in a promotion or pay raise for the employee.
A)True
B)False
Q2) When using the automatic mileage method,which,if any,of the following expenses also can be claimed?
A) Engine tune-up.
B) Parking.
C) Interest on automobile loan.
D) MACRS depreciation.
E) None of the above.
Q3) Nick Lee is a linebacker for the Baltimore Ravens (a professional football club).During the football season he rents an apartment in a Baltimore suburb.The rest of the time he lives with his family in Ann Arbor (MI)and works at a local bank as a vice president in charge of public relations.Can Nick deduct his expenses while away from Ann Arbor? Explain.
Q4) Ashley and Matthew are husband and wife and both are practicing CPAs.On a joint return,Ashley gets to deduct her professional dues but Matthew does not.Explain.
Page 11
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) Sergio was required by the city to pay $2,000 for the cost of new curbing installed by the city in front of his personal residence.The new curbing was installed throughout Sergio's neighborhood as part of a street upgrade project.Sergio may not deduct $2,000 as a tax,but he may add the $2,000 to the basis of his property.
A)True
B)False
Q2) In 2005,Ross,who is single,purchased a personal residence for $170,000 and took out a mortgage of $100,000 on the property.In May of the current year,when the residence had a fair market value of $220,000 and Ross owed $70,000 on the mortgage,he took out a home equity loan for $110,000.He used the funds to purchase a BMW for himself and a Lexus SUV for his wife.For both vehicles,100% of the use is for personal activities.What is the maximum amount on which Ross can deduct home equity interest?
Q3) On December 31,2012,Lynette used her credit card to make a $500 contribution to the United Way,a qualified charitable organization.She will pay her credit card balance in January 2013.If Lynette itemizes,she can deduct the $500 in 2012. A)True
B)False
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Page 12
Chapter 11: Investor Losses
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Sample Questions
Q1) Kenton has investments in two passive activities.Activity A,acquired three years ago,produces income in the current year of $60,000.Activity B,acquired last year,produces a loss of $110,000 in the current year.At the beginning of this year,Kenton's at-risk amounts in Activities A and B are $10,000 and $120,000,respectively.What is the amount of Kenton's suspended passive loss with respect to these activities at the end of the current year?
A) $100,000.
B) $50,000.
C) $40,000.
D) $0.
E) None of the above.
Q2) Joyce,an attorney,earns $100,000 from her law practice in the current year.In addition,she receives $35,000 in dividends and interest during the year.Further,she incurs a loss of $35,000 from an investment in a passive activity.What is Joyce's AGI for the year after considering the passive investment?
Q3) When determining whether an individual is a material participant,participation by an owner's spouse generally counts.
A)True
B)False
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Page 13
Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) Moore incurred circulation expenditures of $300,000 in 2012 and deducted that amount for regular income tax purposes.Moore has a $100,000 negative AMT adjustment for 2013,for 2014,and for 2015.
A)True
B)False
Q2) Ashlyn is subject to the AMT in 2012.She calculates her AMT base to be $200,000.What are the AMT rates that apply for Ashlyn?
Q3) Julia's tentative AMT is $94,000.Her regular income tax liability is $72,000.Julia's AMT is $22,000.
A)True
B)False
Q4) If Jessica exercises an ISO and disposes of the option in the same tax year,are any AMT adjustments required?
Q5) Since most tax preferences are merely timing differences,they eventually will reverse and net to zero.
A)True
B)False
Q6) Why is there a need for a second tax system called the alternative minimum tax?
Q7) For the ACE adjustment,discuss the relationship between ACE and unadjusted AMTI.
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Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) Expenses that are reimbursed by a taxpayer's employer under a dependent care assistance program canalso qualify for the credit for child and dependent care expenses.
A)True
B)False
Q2) If a taxpayer is required to recapture any tax credit for rehabilitation expenditures,the recapture amount need not be added to the adjusted basis of the rehabilitation expenditures.
A)True
B)False
Q3) A taxpayer who qualifies for the low-income housing credit claims the credit over a 15-year period.
A)True
B)False
Q4) For the current year,the base amount for the Social Security portion (old age,survivors,and disability insurance)is different from that for the Medicare portion of FICA.
A)True B)False
Q5) Discuss the treatment of unused general business credits.
Page 15
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Sample Questions
Q1) The adjusted basis of property that is stolen is reduced by the amount of insurance proceeds received and by any recognized loss.
A)True
B)False
Q2) This year,Fran receives a birthday gift of stock worth $75,000 from her aunt.The aunt has owned the stock (adjusted basis $50,000)for 10 years and pays gift tax of $27,000 on the transfer.Fran's basis in the stock is $75,000-the lesser of $77,000 ($50,000 + $27,000)or $75,000.
A)True
B)False
Q3) Define fair market value as it relates to property transactions.
Q4) If a seller assumes the buyer's liability on the property acquired,the buyer's adjusted basis for the property is increased by the amount of the liability assumed.
A)True
B)False
Q5) Discuss the effect of a liability assumption on the seller's amount realized and the buyer's adjusted basis.
Page 16
Q6) What is the general formula for calculating the adjusted basis of property?
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Sample Questions
Q1) Vanessa's personal residence was condemned,and she received a condemnation award of $475,000.Vanessa had owned and occupied the residence for 15 years.The adjusted basis in the residence at the time of condemnation was $200,000.Vanessa used part of the condemnation proceeds to purchase a new residence for $210,000.What is Vanessa's recognized gain or loss and her basis in the new residence?
A) $0; $185,000.
B) $0; $210,000.
C) $15,000; $200,000.
D) $25,000; $210,000.
E) None of the above.
Q2) Distinguish between a direct involuntary conversion and an indirect involuntary conversion.
Q3) Gains and losses on nontaxable exchanges are deferred because the tax law recognizes that nontaxable exchanges result in a change in the substance but not the form of the taxpayer's relative economic position.
A)True
B)False
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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Sample Questions
Q1) Harry inherited a residence from his mother when she died.The mother had a tax basis of $566,000 for the residence when she died and the residence was worth $433,000 at the date of her death.Which of the statements below is correct?
A) Harry's holding period for the residence includes his mother's holding period for the residence.
B) Harry's holding period for the residence does not include his mother's holding period for the residence.
C) Harry's holding period for the residence is automatically long term.
D) b and c
E) None of the above.
Q2) A business taxpayer sells depreciable business property with an adjusted basis of $40,000 for $32,000.The taxpayer held the property for more than a year.The taxpayer has an $8,000 § 1231 loss.
A)True
B)False
Q3) Original issue discount is amortized over the life of the bond.
A)True
B)False
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Chapter 17: Property Transactions: Section 1231 and
Recapture Provisions
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Sample Questions
Q1) Copper Corporation sold machinery for $27,000 on December 31,2012.The machinery had been purchased on January 2,2009,for $30,000 and had an adjusted basis of $21,000 at the date of the sale.For 2012,what should Copper Corporation report?
A) Ordinary income of $6,000.
B) A § 1231 gain of $3,000 and $3,000 of ordinary income.
C) A § 1231 gain of $6,000.
D) A § 1231 gain of $6,000 and $3,000 of ordinary income.
E) None of the above.
Q2) In the "General Procedure for § 1231 Computation: Step 2.§ 1231 Netting," if the gains exceed the losses,the net gain is offset by the "lookback" nonrecaptured § 1231 losses.
A)True
B)False
Q3) Section 1245 may apply to depreciable farm equipment.
A)True
B)False
Q4) A race horse must be held more than 18 months to qualify as a § 1231 asset.
A)True
B)False
Page 19
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Chapter 18: Accounting Periods and Methods
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Sample Questions
Q1) Wendy sold property on the installment basis in 2011 for more than her basis in the property.Wendy was to receive installment payments at the end of each year for the next five years.In 2012,before she collected on the installment obligation for that year,Wendy gave to her daughter (Wilma)the installment obligation so that she could collect the four remaining installments.
A) Wilma must recognize the gain from all the amounts collected on the installment obligation in 2012 and subsequent years.
B) Wendy must recognize the gain each year when Wilma collects on the installment obligation.
C) Wilma must recognize the remaining installment sale gain in 2012.
D) Wendy must recognize the remaining installment sale gain in 2012 and Wilma will not recognize gain from collecting on the installment obligation.
E) None of the above.
Q2) The company has consistently used the LIFO inventory method and has deferred over $1 million of income from using that method.However,in the last two years,the prices it pays for goods has been decreasing.Therefore,the company is considering changing to the FIFO inventory method.What would be some tax consequences of the change?
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Page 20
Chapter 19: Deferred Compensation
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Sample Questions
Q1) A substantial risk of forfeiture exists if an employee's rights to full enjoyment of property are conditioned upon the future performance,or refraining from the performance,of substantial services of that individual.
A)True
B)False
Q2) An individual,age 40,who is not subject to the phase-out provision may contribute a deductible amount to a Roth IRA up to $5,000 per year in 2012.
A)True
B)False
Q3) A retirement plan covers 72% of the non-highly compensated individuals.The plan benefits 48 of the 131 employees.Which is true?
A) The 70% coverage requirement is not met.
B) The plan meets the minimum participation test.
C) The plan meets the 70% coverage requirement, but fails the minimum participation test.
D) The plan does not meet the 70% coverage requirement, but does meet the minimum participation test.
E) None of the above is true.
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Chapter 20: Corporations and Partnerships
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Q1) The amount of the dividends received deduction could be affected by the percentage of ownership held by the recipient corporation in the paying corporation.
A)True
B)False
Q2) Gray is a calendar year taxpayer.In early December 2012,Gray's Board of Directors authorizes a pledge of an $80,000 donation to the Red Cross to help provide food and shelter to victims of natural disasters.The donation is paid as follows: $10,000 in late December 2012,$40,000 in February 2013,and $30,000 in early April 2013.Disregarding percentage limitations,the maximum deduction for 2012 is:
A) $80,000 if Gray is an accrual basis individual.
B) $50,000 if Gray is an accrual basis corporation.
C) $50,000 if Gray is a cash basis corporation.
D) $50,000 if Gray is an accrual basis individual.
E) None of the above.
Q3) A shareholder's basis in property received as a dividend is its fair market value on the date of the distribution.
A)True
B)False
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