Federal Income Taxation
Midterm Exam
Course Introduction
Federal Income Taxation introduces students to the fundamental principles and concepts of federal income tax law in the United States. The course covers the determination of gross income, exclusions, deductions, and credits, emphasizing the calculation of taxable income for individuals. Students will examine tax treatment of property transactions, tax planning strategies, and compliance with relevant statutes and regulations. Through case law analysis and practical examples, the course explores policy considerations and the broader impact of tax law on individual and business decision-making.
Recommended Textbook
Concepts in Federal Taxation 2014 21st Edition by Kevin E. Murphy
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16 Chapters
2109 Verified Questions
2109 Flashcards
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Page 2
Chapter 1: Federal Income Taxation - an Overview
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151 Verified Questions
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Sample Questions
Q1) Which of the following is an example of tax evasion?
A)Beth invests money in tax exempt municipal bonds instead of corporate bonds.
B)Bryan uses the cafeteria plan offered by his employer to fund pension plan contributions for his retirement.
C)Bauregard, a very wealthy 87-year-old individual, gives bonds to each of his grandchildren so that the interest income on them would be taxed at a lower tax rate.
D)Bertha won $500 cash in an amateur mud-wrestling contest but doesn't report it on her tax return.
E)All of the above are examples of tax evasion.
Answer: D
Q2) A regressive tax rate structure is defined as a tax in which the average tax rate decreases as the tax base increases.
A)True
B)False
Answer: True
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Chapter 2: Income Tax Concepts
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Sample Questions
Q1) Sam coaches a little league baseball team.He makes 15 copies of the team's schedule to give to the players on his employer's copy machine.The cost of the copies is not income to Sam due to the
A)Ability to Pay Concept.
B)Administrative Convenience Concept.
C)Arm's-Length Transaction Concept.
D)Capital Recovery Concept.
E)Pay-as-You-Go Concept.
Answer: B
Q2) An individual can legally assign income to another individual,and the assignment relieves the owner of the income from paying tax on the income.
A)True
B)False
Answer: False
Q3) All deductions are allowed because of the legislative grace concept.
A)True
B)False
Answer: True
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4
Chapter 3: Income Sources
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Sample Questions
Q1) Alan has the following capital gains and losses during the current year: \(\begin{array}{lc}
\text {Short-term capital loss } &\$(4,000) \\
\text {Collectibles gain } &3,000 \\
\text {Long-term capital gain } &8,000 \end{array}\)
If Alan's marginal tax rate is 33%,what is the effect of the capital gains and losses on his taxable income and income tax liability?
\(\begin{array}{cl}
\text { Income } & \text { Tax Liability } \\
a.\$ 7,000 \text { increase } & \$ 2,310 \text { increase } \\
b.\$ 8,000 \text { increase } & \$ 1,840 \text { increase } \\
c.\$ 7,000 \text { increase } & \$ 1,400 \text { increase } \\
d.\$ 8,000 \text { increase } & \$ 1,200 \text { increase } \\
e.\$ 7,000 \text { increase } & \$ 1,050 \text { increase } \end{array}\)
Answer: E
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Chapter 4: Income Exclusions
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Sample Questions
Q1) Returns of human capital
I.are excluded from gross income.
II.include unemployment compensation benefits.
III.include workers' compensation payments received for personal injury.
IV.are treated the same for tax purposes as all other forms of capital recovery.
A)Statements I and III are correct.
B)Statements II, III, and IV are correct.
C)Statements I, III, and IV are correct.
D)Only statement II is correct.
E)Statements I, II, III, and IV are correct.
Q2) On April 1,Sally is given $20,000 worth of General Motors bonds for her 18<sup>th</sup> birthday.On June 30,Sally receives the $800 annual interest payment on the bonds.How much income should Sally recognize due to these two events?
A)$ - 0 -
B)$ 200
C)$ 800
D)$20,000
E)$20,800
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Chapter 5: Introduction to Business Expenses
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168 Verified Questions
168 Flashcards
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Sample Questions
Q1) Several factors are used to determine whether an activity is classified as a hobby or as a business.Which of the following are factors that aid in this determination?
I.The financial status of the taxpayer
II.The expectation that the assets involved in the activity will increase in value.
III.The taxpayer's success in similar activities.
IV.The amount of personal pleasure and enjoyment that accrues to the taxpayer.
A)Only statements II, III, and IV are correct.
B)Only statement III is correct.
C)Statements I, II, and III are correct.
D)Only statement IV is correct.
E)Statements I, II, III, and IV are correct.
Q2) Devery,Inc.sells high tech machine parts that are fully warranted against defects.Based on prior years experience they can expect to incur $20,000 of warranty expense on current sales.They are on the accrual basis,and the warranty expense is based on a reasonable estimate,so Devery can deduct the $20,000.
A)True
B)False
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Page 7
Chapter 6: Business Expenses
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Sample Questions
Q1) Richard is a sales person for Publix Company.Every month Richard fills out an expense account report,documenting all his expenses and submits it for reimbursement.During the current year,Richard submitted documentation and receives $12,500 of reimbursements.All his claims are reimbursed.How will these expenses and reimbursements affect Richard's income tax calculation?
i.Expense amounts are deductible from AGI.II.Reimbursed amounts are excluded from gross income.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Thomas changes jobs during the year and moves from Philadelphia to El Paso.Which of the following expenses relating to the move can Thomas deduct?
I.Prior to the move,Thomas flies to El Paso to find an apartment.
II.The cost of meals while driving his household goods to El Paso.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
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Page 8
Chapter 7: Losses: Deductions and Limitations
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Sample Questions
Q1) Limited partnership
A)A loss that is generally not deductible.
B)The borrower is personally liable for the debt.
C)The loss is used to offset income in future periods.
D)A liability that is only secured by the underlying property.
E)The loss may be used to offset income from prior periods.
F)A type of stock that receives some ordinary loss treatment.
G)Involved in a rental activity for more than 500 hours in a year.
H)Cash or other assets contributed plus recourse debts of the activity.
I)Owns at least a 10% interest and is significantly involved in the rental activity.
J)The amount of the loss for fully destroyed property is the property's adjusted basis.
K)The amount of loss is limited to the lower of the property's adjusted basis, or the reduction in fair market value.
L)Management is left to at least one general partner whose liability is not limited and who is responsible for the on-going activities of the business.
Q2) Why did Congress enact the at-risk rules?
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Chapter 8: Taxation of Individuals
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Sample Questions
Q1) Erin is 67,single and has an adjusted gross income of $14,300.She has no dependents and her itemized deductions are $6,000.What is her 2013 taxable income?
A)$ 2,800
B)$ 3,350
C)$ 4,650
D)$ 4,750
E)$ 6,000
Q2) Eileen pays $14,000 of interest related to her purchase of investments.During the current year,Eileen's adjusted gross income is $80,000,which includes investment related income of $19,000.Her other investment expenses are $9,000.Determine whether the interest is deductible,how it would be deducted on the taxpayer's return (if there are alternatives possible,discuss the conditions which would determine the treatment)and any limitations that might be placed on the deduction.
Q3) Alli is 23 years old,a full time student,and a dependent of her parents.She earns $2,000 from her job as a waitress and receives $3,000 of interest on a savings account established by her grandparents.
V
Q4) Explain the support test and the gross income test to be a qualifying relative.
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Chapter 9: Acquisitions of Property
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Sample Questions
Q1) Tien purchases an office building for $400,000,paying a $75,000 cash down payment and borrowing $325,000 from Atlantic Meridian Mortgage Co.The purchase price is properly allocated 90% to the building and 10% to the land.Two years after the purchase,Tien remodeled one floor of the building at a cost of $25,000.Annual maintenance costs and property taxes total $4,000.A total depreciation of $36,000 is deducted over the 3 years.Determine the adjusted basis of the building and the land as of the end of year 3:
A)\(\$ 56,500 \text { building; } \quad \$ 7,500 \text { land }\)
B)\(\$ 89,000\) building; \( \quad \)\( \quad \)\( \quad \)\( \quad \) \(\$ 10,000\) land
C)\(\$ 346,500 \text { building; } \quad \$ 42,500 \text { land }\)
D)\(\$ 349,000\) building;\( \quad \)\( \quad \)\( \quad \)\( \quad \)\(\$ 40,000\) land
E)\(\$ 353,000 \text { building; } \quad \$ 40,000 \text { land }\)
Q2) Personal property consists of any property that is held by an individual.
A)True B)False
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Chapter 10: Cost Recovery on Property: Depreciation, depletion, and Amortization
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Sample Questions
Q1) Davis,Inc.,a motorcycle wheel manufacturer,purchased a new spoke machine in 2013 for $200,000.What are the tax effects of this purchase?
I.If taxable income is $100,000,then $100,000 can be expensed in 2013.
II.No Section 179 election is allowed if Davis decides to use a $200,000 depreciable basis.
III.If Davis had purchased a total of $2,400,000 of equipment in 2013,the corporation can deduct only $100,000 of the purchases in 2013 through use of the Section 179 election.
A)Only statement I is correct.
B)Statements I and II are correct.
C)Statements II and III are correct.
D)Statements I and III are correct.
E)Statements I, II, and III are correct.
Q2) Why would a taxpayer ever elect to use the alternative depreciation system (ADS)rather than the MACRS?
Q3) The earlier the depreciation deduction can be taken,the greater the present value of the tax savings will be to the taxpayer.
A)True
B)False
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Page 12
Chapter 11: Property Dispositions
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140 Flashcards
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Sample Questions
Q1) Which of the following trade or business assets are Section 1245 properties?
I.Racehorses.
II.Livestock held for breeding purposes
III.Manufacturing equipment.
IV.Residential rental property placed in service in 2008.
A)Only statement I is correct.
B)Statements II and IV are correct.
C)Statements I, II, and III are correct.
D)Statements I and IV are correct.
E)Statements I, II, III, and IV are correct.
Q2) Corky receives a gift of property from her Aunt Cynthia.Cynthia purchased the property 17 years ago for $375,000.On the date of the gift,the property is appraised at $500,000.What is Corky's holding period for the property if she sells it one month after the gift was completed?
A)Short-term.
B)Long-term.
C)Holding period is not relevant since the gain is ordinary.
D)Holding period classification cannot be determined without knowing the selling price.
Q3) What incentive provisions or preferential treatments exist for capital gains?
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Page 13
Chapter 12: Nonrecognition Transactions
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Sample Questions
Q1) Land in London,England for land in San Francisco,California.
A)qualifies as a like-kind exchange
B)does not qualify as a like-kind exchange
Q2) Cindy exchanges investment real estate with Russell.Cindy purchased her realty two years ago for $280,000,and it is encumbered by a mortgage of $100,000 and has a fair market value of $320,000 when exchanged.Russell paid $80,000 cash for his property in 1999 and it is appraised at $150,000 on the day of the exchange.Russell assumes the debt on his new land and pays Cindy enough in cash to balance the exchange.What is Cindy's recognized gain (loss)on the exchange?
A)$ -0-
B)$ 40,000
C)$100,000
D)$170,000
Q3) Which of the following can be income deferral transactions?
I.Sale of municipal bonds.
II.Involuntary conversions of property.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
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Chapter 13: Choice of Business Entity - General Tax and
Nontax Factorsformation
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Sample Questions
Q1) Partners have extensive flexibility in choosing their tax year-end for their partnership.
A)True
B)False
Q2) Carlotta is the director of golf for Birck Enterprises,an electing S corporation.Carlotta owns a 20% interest in Birck.She receives a salary of $60,000 and fringe benefits costing $6,000.Birck's taxable income before considering the payments to and on behalf of Carlotta is $250,000.Birck's distributes a $50,000 dividend to its shareholders.How much income does Carlotta have from Birck?
A)$ 66,000
B)$ 70,000
C)$ 96,800
D)$ 98,000
E)$102,800
Q3) Sole proprietors are allowed to deduct owner-employee salaries and fringe benefits.
A)True
B)False
Q4) Discuss the characteristics of a personal service corporation (PSC).
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Chapter 14: Choice of Business Entity - Operations and Distributions
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Sample Questions
Q1) Toliver Corporation incurs a long-term capital loss of $38,000 and a short-term capital gain of $33,000.Also,Toliver has operating income of $175,000.What is Toliver's taxable income?
A)$ 45,000
B)$170,000
C)$172,000
D)$175,000
E)$208,000
Q2) Valmont owns 98% of the stock of Barnes Corporation,a manufacturer.During the current year,Barnes has operating income of $64,000,interest income of $10,000 from investments,and passive losses from investments in limited partnerships of $20,000.Barnes Corporation pays $12,000 in dividends.What is Barnes' taxable income for the current year?
A)$34,000
B)$48,600
C)$54,000
D)$62,000
E)$74,000
Q3) Discuss two tax-planning techniques that can be used by a 100% owner-employee to reduce his/her tax liability.
Page 16
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Chapter 15: Choice of Business Entity - Other
Considerations
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Sample Questions
Q1) On January 22,2011,Dalton Corporation granted Kathleen an option to acquire 1,500 shares of the company's stock for $ 7 per share.The fair market price of the stock on the date of grant was $13.The stock requires that Kathleen remain with the company for one year after the date of exercise.The option did not have a readily ascertainable fair market value.Kathleen exercises the option on August 10,2012,when the fair market value of the stock is $17.She makes a Section 83 (b)election at the exercise date.On August 10,2013,the fair market value of the stock is $23 per share.How much must she report as income in 2012 and 2013?
\(2012 \quad\quad \quad 2013\)
a. \(\$ - 0\) - \(\quad \$ 15,000\)
b. \(\$ - 0\) - \(\quad \$ 24,000\)
c. \(\$ 10,500 \quad \$ 4,500\)
d. \(\$ 15,000 \quad \$ - 0 -\)
Q2) The employee's contribution to a nonqualified pension plan cannot be deferred,and the employer is not allowed a tax deduction for the contribution even though the employee includes the contribution in their income.
A)True
B)False
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Chapter 16: Tax Research
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Sample Questions
Q1) Which of the following is true of revenue rulings?
A)Lower courts are bound by them.
B)They are a subset of Treasury Regulations.
C)Once affirmed by an appellate court, they have the force of law.
D)Although they represent the official policy of the IRS, courts may overrule them.
E)All of the above.
Q2) Tara does not agree with a proposed deficiency of additional tax resulting from an examination of her individual income tax return.She has not been able to satisfactorily resolve her case within the administrative processes of the Internal Revenue Service.Which of the following courts may she petition without first making payment of the contested deficiency?
A)United States Tax Court.
B)United States District Court.
C)U.S. Court of Federal Claims.
D)Any of the above.
Q3) Search engines used in computer-assisted tax research tools provide advantages over manual searches.
A)True
B)False
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Page 18