Federal Income Taxation Final Exam
Course Introduction
Federal Income Taxation explores the principles and application of federal income tax laws in the United States, focusing on the taxation of individuals. The course covers topics such as gross income, deductions, exemptions, tax credits, the determination of taxable income, and the calculation of tax liability. Students will examine statutory, regulatory, and case law authority while developing analytical skills for tax planning, compliance, and decision-making. Issues such as capital gains, tax accounting, and policy considerations underlying tax rules are also addressed, preparing students for both practical and theoretical aspects of federal tax law.
Recommended Textbook
South Western Federal Taxation 2019 Comprehensive 42nd Edition by David M. Maloney
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) Ultimately, most taxes are paid by individuals.
A)True
B)False Answer: True
Q2) Use tax
A)Deferral of gains from involuntary conversions
B)Carryforward of net operating losses
C)"No change" is one possible result
D)State income tax applied to visiting nonresident
E)IRS special agent
F)Undoing the "piggyback" result
G)Ideal budget goal as to new tax legislation
H)Every state that has a general sales tax has one
I)Imposed by all states and the Federal government
J)Imposed by some states but not the Federal government
K)Imposed only by the Federal government
L)No correct match provided
Answer: H
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Chapter 2: Working with the Tax Law
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Q1) The IRS will not acquiesce to the following tax decisions:
A) U.S. District Court.
B) U.S. Tax Court.
C) U.S. Court of Federal Claims.
D) Small Case Division of the U.S. Tax Court.
E) All of these.
Answer: D
Q2) Which is a primary source of tax law?
A) Serverino R. Nico, Jr., 67 T.C. 647 (1977).
B) Article by a Federal judge in Tax Notes.
C) An IRS publication.
D) Written determination letter.
E) All of the above are primary sources.
Answer: A
Q3) How can Congressional Committee Reports be used by a tax researcher?
Answer: Congressional Committee Reports often explain the provisions of proposed legislation and are a valuable source of ascertaining the intent of Congress. The intent of Congress is the key to interpreting new legislation by taxpayers, especially before Regulations are published.
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Page 4
Chapter 3: Computing the Tax
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Q1) The Martins have a teenage son who has become an accomplished bagpiper. With proper promotion and scheduling, the son has good income potential by charging for his services at special events (particularly funerals). However, the Martins are fearful that the income could generate a kiddie tax and cause them the loss of a dependent tax credit. Are the Martins' concerns justified? Explain.
Answer: The income received by the son would be earned income. Therefore, the kiddie tax is not a problem since it applies only to unearned income. As long as the son is under age 19 (or a full-time student under age 24), he is a dependent as a qualifying child. Under these rules, the amount of the son's income does not matter (unless he becomes self-supporting). If the son is age 19 (or older) and not a student, he must satisfy the qualifying relative rules. Here, not meeting the gross income test (in 2018, gross income must be less than $4,150) would mean their son would not be a dependent.
Q2) Frank sold his personal use automobile for a loss of $9,000. He also sold a personal coin collection for a gain of $10,000. As a result of these sales, $10,000 is subject to income tax.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Freddy purchased a certificate of deposit for $20,000 on July 1, 2018. The certificate's maturity value in two years (June 30, 2020) is $21,218, yielding 3% before-tax interest.
A) Freddy must recognize $1,218 gross income in 2018.
B) Freddy must recognize $1,218 gross income in 2020.
C) Freddy must recognize $600 (.03 × $20,000) gross income in 2020.
D) Freddy must recognize $300 (.03 × $20,000 × .5) gross income in 2018.
E) None of these.
Q2) In 2018, Juan, a cash basis taxpayer, was offered $3 million for signing a professional baseball contract. He counter offered that he would receive $900,000 per year for 4 years beginning in 2019. The team accepted the counteroffer. Juan constructively received $3 million in 2018.
A)True
B)False
Q3) Norma's income for 2018 is $27,000 from part-time work and $9,000 of Social Security benefits. Norma is not married. A portion of her Social Security benefits must be included in her gross income.
A)True
B)False
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Chapter 5: Gross Income: Exclusions
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Q1) 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.)
Q2) Tonya is a cash basis taxpayer. In 2018, she paid state income taxes of $8,000. In early 2019, she filed her 2018 state income tax return and received a $900 refund.
A) If Tonya itemized her deductions in 2018 on her Federal income tax return, she should amend her 2018 return and reduce her itemized deductions by $900.
B) If Tonya itemized her deductions in 2018 on her Federal income tax return and her itemized deductions exceeded the standard deduction by at least $900, the refund will not affect her 2019 tax return.
C) If Tonya itemized her deductions in 2018 on her Federal income tax return, she must amend her 2018 Federal income tax return and use the standard deduction.
D) If Tonya itemized her deductions in 2018 on her Federal income tax return and her itemized deductions exceeded the standard deduction by more than $900, she must recognize $900 income in 2019 under the tax benefit rule.
E) None of these.
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Chapter 6: Deductions and Losses: In General
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Q1) Ordinary and necessary business expenses, other than cost of goods sold, of an illegal drug trafficking business do not reduce taxable income.
A)True
B)False
Q2) In 2018, unreimbursed employment related expenses are classified as deductions for AGI.
A)True
B)False
Q3) LD Partnership, a cash basis taxpayer, purchases land and a building for $200,000 with $150,000 of the cost being allocated to the building. The gross receipts of the partnership are less than $100,000. LD must capitalize the $50,000 paid for the land, but can deduct the $150,000 paid for the building in the current tax year.
A)True
B)False
Q4) The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction.
A)True
B)False
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) The cost of repairs to damaged property is not an acceptable measure of the loss in value of the property.
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) If investment property is stolen, the amount of the loss is the adjusted basis of the property at the time of the theft reduced by $100 and 10% of AGI.
A)True
B)False
Q4) If a non-corporate taxpayer has an "excess business loss" for the year, it is not allowed.
A)True
B)False
Q5) Losses on rental property are classified as deductions for AGI.
A)True
B)False
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Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Q1) On January 15, 2018, Vern purchased the rights to a mineral interest for $3,500,000. At that time it was estimated that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000 units were sold for $800,000. Vern incurred expenses during 2018 of $500,000. The percentage depletion rate is 22%. Determine Vern's depletion deduction for 2018.
A) $150,000
B) $175,000
C) $176,000
D) $200,000
E) $250,000
Q2) Simpson Company, a calendar year taxpayer, acquires an apartment building on March 22, 2018 for $900,000. What is the maximum cost recovery deduction it may take for 2018?
A) $18,297.
B) $22,617.
C) $25,911.
D) $31,365.
Q3) The cost recovery period for 3-year class property is 4 years.
A)True
B)False
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related
Expenses
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Q1) Jacob is a landscape architect who works out of his home. He wonders whether or not he will have nondeductible commuting expenses when he drives to the locations of his clients. Please comment.
Q2) A self-employed taxpayer who uses the automatic mileage method to compute auto expenses can also deduct the business portion of automobile club dues.
A)True
B)False
Q3) Dana, age 31 and unmarried, is an active participant in a qualified retirement plan. Her AGI is $124,000. What amount, if any, may Dana contribute to a Roth IRA in 2018?
A) $0.
B) $3,225.
C) $4,033.
D) $5,500.
E) None of the above
Q4) For tax purposes, a statutory employee is treated the same as a common law employee.
A)True
B)False
11
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) In the current year, Jerry pays $8,000 to become a charter member of Mammoth University's Athletic Council. The membership ensures that Jerry will receive choice seating at all of Mammoth's home basketball games. Also this year, Jerry pays $2,200 (the regular retail price) for season tickets for himself and his wife. For these items, how much qualifies as a charitable contribution?
A) $0
B) $6,400
C) $8,000
D) $10,200
E) None of the above
Q2) Linda, who has AGI of $120,000 in the current year, contributes stock in Mauve Corporation (a publicly traded corporation) to the Salvation Army, a qualified charitable organization. The stock is worth $65,000, and Linda acquired it as an investment four years ago at a cost of $50,000.
a. What is the total amount that Linda can deduct as a charitable contribution, assuming she carries over any disallowed contribution from the current year to future years?
b. Describe the restrictions that apply when calculating the deduction in the carryover years.
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Chapter 11: Investor Losses
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Q1) Which of the following is not a factor that should be considered in determining whether an activity is treated as an appropriate economic unit?
A) The interdependencies between the activities.
B) The extent of common control.
C) The extent of common ownership.
D) The geographical location.
E) All of the above are relevant factors.
Q2) Sarah purchased for $100,000 a 10% interest in a business venture that is not subject to the passive activity rules.
During the first year, her share of the entity's loss was $120,000. At the beginning of the second year, the entity obtained $800,000 of recourse financing. During the second year, Sarah withdrew cash of $20,000, and her share of the entity's loss was $25,000. Calculate the amount of loss that Sarah may claim in each of the two years and determine her at-risk amount at the end of each year.
Q3) Treatment of an installment sale of a passive activity.
Q4) Identify how the passive activity loss rules broadly classify various types of income and losses. Provide examples of each category.
Q5) Treatment of suspended credits when passive activity is sold at a loss.
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Chapter 12: Tax Credits and Payments
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Q1) Steve records a tentative general business credit of $110,000 for the current year. His net regular tax liability before t general business credit is $125,000, and his tentative minimum tax is $100,000. Compute Steve's allowable general business credit for the year.
Q2) Unused foreign tax credits can be carried back three years and forward fifteen years. A)True
B)False
Q3) A taxpayer who meets the age requirement and receives no Social Security benefits will be entitled to the full tax credit for the elderly.
A)True
B)False
Q4) How does the FICA tax compare to the self-employment tax? How are these two taxes similar and how do they differ?
Q5) Certain high-income individuals are subject to three additional Medicare taxes-on wages, unearned income, and tax credits claimed.
A)True
B)False
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Chapter 13: Property Transactions: Determination of Gain or Loss,
Basis Considerations, and Nontaxable Exchanges
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Q1) Which of the following might motivate a taxpayer to try to avoid like-kind exchange treatment?
A) Taxpayer has unused NOL carryovers.
B) Taxpayer has unused general business credit carryovers.
C) Taxpayer has suspended or current passive activity losses.
D) Only a. and b. are correct.
E) a., b., and c. are correct.
Q2) If boot is received in a § 1031 like-kind exchange that results in some of the realized gain being recognized, the holding period for both the like-kind property and the boot received begins on the date of the exchange.
A)True
B)False
Q3) The basis for depreciation on depreciable gift property received is the donor's adjusted basis of the property at the date of the gift (assuming no gift taxes are paid). The rule applies regardless of whether the fair market value at the date of the gift is greater than or less than the donor's adjusted basis.
A)True
B)False
Q4) What is the general formula for calculating the adjusted basis of property?
Page 15
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Chapter 14: Property Transactions: Capital Gains and
Losses, Section 1231, and Recapture Provisions
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Q1) Personal use property casualty gains and losses are not subject to the § 1231 rules.
A)True
B)False
Q2) "Collectibles" held long-term and sold at a gain are subject to maximum tax rate of 28%. An individual taxpayer recently sold an antique car for $40,000. The car had been held for several years and $30,000 was originally paid for it. Explain why the car is or is not a collectible.
Q3) Once § 1231 gains are netted against § 1231 losses, if the gains exceed the losses, the net gain is offset by the "lookback" nonrecaptured § 1231 losses.
A)True
B)False
Q4) If § 1231 asset casualty gains and losses net to a gain, the gain is treated as a § 1231 gain.
A)True
B)False
Q5) Section 1245 applies to amortizable § 197 intangible assets.
A)True
B)False
Page 16
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Chapter 15: Taxing Business Income
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Q1) Once a taxpayer reaches certain taxable income thresholds, § 199A limits the qualified business income (QBI) deduction. These thresholds ($315,000 for married taxpayers filing jointly and $157,500 for all other taxpayers) are indexed for inflation after 2018.
A)True
B)False
Q2) Rajib is the sole shareholder of Robin Corporation, a calendar year S corporation. In the current year, Robin earned net profit of $350,000 ($520,000 gross income - $170,000 operating expenses) and distributed $80,000 to Rajib. Rajib must report Robin Corporation profit of $350,000 on his Federal income tax return.
A)True
B)False
Q3) Under the "check-the-box" Regulations, a two-owner LLC that fails to elect to be to treated as a corporation will be taxed as a sole proprietorship.
A)True
B)False
Q4) What is a limited liability company? What favorable nontax and tax attributes does the LLC entity form offer taxpayers?
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Chapter 16: Accounting Periods and Methods
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Q1) Related-party installment sales include all of the following except the first seller's:
A) Brothers and sisters.
B) Controlled corporations.
C) Lineal descendants and ancestors.
D) Uncles and aunts.
E) All of the above would be considered related parties.
Q2) Charlotte sold her unincorporated business for $600,000 in 2018. The sales contract allocated $120,000 to equipment, $300,000 to land, and $180,000 to goodwill. Charlotte had a $0 basis in the goodwill, the land cost $150,000, and the equipment originally cost $250,000 but it was fully depreciated. What is the amount of the gain eligible for installment sales treatment?
A) $0
B) $330,000
C) $450,000
D) $600,000
E) None of the above
Q3) Using your knowledge of GAAP and financial reporting, list and explain one good reason why GAAP should not be used for tax purposes and one good reason why it should be used.
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Page 18
Chapter 17: Corporations: Introduction and Operating Rules
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Q1) Canary Corporation, a calendar year C corporation, received an $80,000 dividend from Stork Corporation. Canary owns 18% of the Stork Corporation stock. Assuming it is not subject to the taxable income limitation, Canary's dividends received deduction is $40,000.
A)True
B)False
Q2) Luis is the sole shareholder of a regular C corporation, and Eduardo owns a proprietorship. In the current year, both businesses make a profit of $80,000 and each owner withdraws $50,000 from his business. With respect to this information, which of the following statements is incorrect?
A) Eduardo must report $80,000 of income on his return.
B) Luis must report $80,000 of income on his return.
C) Eduardo's proprietorship is not required to pay income tax on $80,000.
D) Luis's corporation must pay income tax on $80,000.
E) None of the above.
Q3) In general, all corporations that maintain inventory for sale to customers are required to use the accrual method of accounting for all income and expense items.
A)True
B)False
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Chapter 18: Corporations: Organization and Capital Structure
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Q1) Tina incorporates her sole proprietorship with assets having a fair market value of $100,000 and an adjusted basis of $110,000. Even though § 351 applies, Tina may recognize her realized loss of $10,000.
A)True B)False
Q2) If a transaction qualifies under § 351, any recognized gain is equal to the value of the boot received.
A)True B)False
Q3) Lark City donates land worth $300,000 and cash of $100,000 to Orange Corporation as an inducement to locate in the 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?
Q4) For § 351 purposes, stock rights and stock warrants are included in the definition of "stock."
A)True B)False
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Chapter 19: Corporations: Distributions Not in Complete
Liquidation
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Q1) On January 30, Juan receives a nontaxable distribution of stock rights from Platinum Corporation. Each right entitles the holder to purchase one share of stock for $40. One right is issued for every share of stock owned. Juan owns 100 shares of stock purchased two years ago for $4,000. At the date of distribution, the rights are worth $1,000 (100 rights at $10 per right) and Juan's stock in Platinum is worth $5,000 (or $50 per share). On December 1, Juan sells all 100 stock rights for $12 per right. How much gain does Juan recognize on the sale?
A) $1,200
B) $533
C) $400
D) $0
E) None of the above
Q2) To determine current E & P, taxable income must be increased for any dividends received deduction.
A)True
B)False
Q3) Loss on sale between related parties in 2018.
Q4) Excess capital loss in year incurred.
Q5) Gain on installment sale in 2018 deferred until 2019.
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) Sparrow Corporation purchased 90% of the stock of Warbler Corporation eight years ago for $1 million. In the current year, Sparrow liquidates Warbler and acquires assets with a basis to Warbler of $850,000 (fair market value of $1.2 million). Sparrow will have a basis in the assets of $850,000 (Warbler's basis in the assets), and no recognized gain or loss.
A)True
B)False
Q2) The built-in loss limitation in a complete liquidation does not apply to losses attributable to a decline in a property's fair market value after its transfer to the corporation.
A)True B)False
Q3) Explain whether shareholders are exempted from gain/loss recognition in nontaxable corporate reorganization or the gain/loss recognition is merely postponed. If postponed, what is the vehicle for ensuring the postponed gain/loss will be recognized in the future?
Q4) Discuss the role of letter rulings in corporate reorganizations.
Q5) Explain why the antistuffing rules were enacted to limit the deductibility of losses realized by a corporation upon liquidation.
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Chapter 21: Partnerships
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Q1) Julie and Kate form an equal partnership during the current year. Julie contributes cash of $200,000, and Kate contributes property (adjusted basis of $90,000, fair market value of $260,000) subject to a nonrecourse liability of $60,000. As a result of these transactions, Kate has a basis in her partnership interest of $120,000.
A)True
B)False
Q2) Kristie is a 30% partner in the KKM Partnership. During the current year, KKM reported gross receipts of $280,000 and a charitable contribution of $30,000. The partnership paid office expenses of $80,000. In addition, KKM distributed $20,000 each to partners Kaylyn and Megan, and the partnership paid partner Kaylyn $20,000 for administrative services. Kristie reports the following income from KKM during the current tax year:
A) $54,000 ordinary income? $9,000 charitable contribution.
B) $60,000 ordinary income? $9,000 charitable contribution.
C) $36,000 ordinary income.
D) $54,000 ordinary income.
E) None of the above is correct.
Q3) Carried interest
Q4) Required taxable year
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Chapter 22: S Corporations
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Q1) Pepper, Inc., an S corporation, holds a $1 million balance in accumulated E&P. It reports sales revenues of $400,000, taxable interest of $380,000, operating expenses of $250,000, and deductions attributable to the interest income of $140,000. What is Pepper's passive income penalty tax payable, if any?
A) $380,000.
B) $116,842.
C) $24,537.
D) $0.
Q2) During the year, Miles Nutt, the sole shareholder of a calendar year S corporation, received a distribution of $16,000. At the end of last year, his stock basis was $4,000. The corporation earned $11,000 ordinary income during the year. It has no accumulated E & P. Which statement is correct?
A) Nutt recognizes a $1,000 LTCG.
B) Nutt's stock basis is $2,000.
C) Nutt's ordinary income is $15,000.
D) Nutt's tax-free return of capital is $11,000.
Q3) An S corporation recognizes a ________________ on any distribution of appreciated property.
Q4) Discuss two ways that an S election may be terminated.
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Chapter 23: Exempt Entities
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Q1) Which of the following statements regarding low-cost articles is correct?
A) The distribution of low-cost articles can be classified as not being an unrelated trade or business.
B) For 2018, a low-cost article is one that costs $10.80 or less.
C) Any contributions received as the result of the distribution of low-cost articles must be included in unrelated business income.
D) Only a. and b. are correct.
E) a., b., and c. are correct.
Q2) What tax forms are used to apply for exempt status? Be specific.
Q3) Federal agencies exempt from Federal income tax under § 501(c)(1) are not subject to the unrelated business income tax (UBIT).
A)True
B)False
Q4) A § 501(c)(3) organization exchanges its membership lists with another exempt organization. What are the Federal income tax consequences?
Q5) Form 990-PF
Q6) Branded calendars
Q7) Tax on failure to distribute adequate amounts of income
Page 25
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Chapter 24: Multistate Corporate Taxation
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Q1) A use tax applies when a State A resident purchases:
A) A new automobile from a State A dealership.
B) A used automobile from the web site of a State A dealership.
C) A new automobile from a State B dealership, then uses the car back at home.
D) A new automobile that is purchased from an online seller.
Q2) Dividend income from P & G stock held.
Q3) In most states, a taxpayer's income is apportioned on the basis of a formula measuring the extent of business contact, and allocated according to the location of property owned or used.
A)True
B)False
Q4) For sales/use tax purposes, nexus usually requires that:
A) The seller has customers in the state.
B) The seller has a physical presence in the state.
C) The customer use the property in the state in which the sale took place.
D) The customer have a registration number with the state in which the property was sold.
Q5) Sales/use tax in most states applies to a restaurant meal.
A)True
B)False
Page 26
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Chapter 25: Taxation of International Transactions
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Q1) Which of the following statements is false in regard to the U.S. income tax treaty program?
A) There are about 70 bilateral income tax treaties between the U.S. and other countries.
B) Tax treaties generally provide for primary taxing rights that require the other treaty partner to allow a credit for the taxes paid on the twice-taxed income.
C) U.S. income tax treaties are written to set up a "network" of up to five foreign countries that are covered by the treaty language.
D) None of the above statements is false.
Q2) A non-U.S. subsidiary whose income may be taxed to the U.S. parent before repatriation.
Q3) Gains on the sale of U.S. real property held directly or indirectly through U.S. stock ownership by NRAs and foreign corporations are subject to tax at capital gains rates under FIRPTA.
A)True
B)False
Q4) Method for sourcing income and deductions.
Q5) A CFC's profits from sales of goods and services.
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Page 27
Chapter 26: Tax Practice and Ethics
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184 Verified Questions
184 Flashcards
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Sample Questions
Q1) A taxpayer can take a dispute to the ________________ Division of the Tax Court when the disputed amounts do not exceed $50,000.
Q2) The taxpayer must pay a significant fee to have a letter ruling issued by the IRS.
A)True
B)False
Q3) The IRS can require that the taxpayer produce its financial accounting records, to determine if taxable income is computed correctly.
A)True
B)False
Q4) The tax law requires that all paid tax preparers:
A) Have a current Preparer Tax Identification Number (PTIN).
B) Hold a bachelor's degree.
C) Hold a bachelor's degree in business or economics.
D) Complete at least 20 hours or continuing education courses every year.
Q5) The IRS can waive the penalty for a substantial understatement of a tax liability if the taxpayer shows ________________for the position taken on the tax return.
Q6) Preparer penalty for taking an unreasonable tax return position.
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Page 28
Chapter 27: The Federal Gift and Estate Taxes
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141 Verified Questions
141 Flashcards
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Sample Questions
Q1) Mandy and Hal (mother and son) purchased land for $600,000 as joint tenants with right of survivorship. Of the $600,000 purchase price, Mandy provided $300,000 and Hal $300,000 (of which $200,000 had been received as a gift from Mandy). Hal dies first when the land is worth $3,000,000. As to the land, Hal's gross estate must include:
A) $500,000.
B) $1,500,000.
C) $2,500,000.
D) $3,000,000.
E) None of the above.
Q2) For Federal estate tax purposes, the gross estate does not include property that will pass to a surviving spouse.
A)True
B)False
Q3) Ten cemetery lots purchased by decedent prior to death for use by himself and his family.
Q4) Howard establishes a trust, life estate to his children, remainder to the grandchildren. Under its terms, the trust is revocable by Howard.
Q5) Mortgage on land included in gross estate and willed to decedent's children.
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Chapter 28: Income Taxation of Trusts and Estates
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161 Verified Questions
161 Flashcards
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Sample Questions
Q1) The Suarez Trust generated distributable net income (DNI) this year of $150,000, two-thirds of which was portfolio income, and the balance of which was exempt interest. Under the terms of the trust, Clara Suarez is to receive an annual income distribution of $30,000. At the discretion of the trustee, additional distributions can be made to Clara or to Clark Suarez III. This year, the trustee's distributions to Clara totaled $60,000. Clark received $90,000. How much of the trust's DNI is assigned to Clara?
A) $75,000
B) $60,000
C) $45,000
D) $30,000
Q2) The Malik Estate operates a manufacturing business. Malik made no income distributions this year. It can claim the full deduction for the MACRS depreciation of the assets of the business.
A)True
B)False
Q3) Under the Federal income tax rules for trusts and estates, a(n) ________________ generally must use a calendar tax year, but a(n)________________ can select any tax year-end.
Q4) A trust that can accumulate, rather than distribute, its accounting income.
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