Federal Income Taxation
Question Bank
Course Introduction
This course provides an in-depth analysis of the federal income tax system as it applies to individuals and business entities in the United States. Major topics include the computation of taxable income, identification and treatment of different types of income, deductions, tax credits, and the principles underlying tax policy. Students will explore the Internal Revenue Code, Treasury regulations, and case law to understand the practical application of tax laws, as well as develop foundational skills in tax planning and compliance. The course emphasizes both theoretical concepts and real-world issues commonly encountered in the field of taxation.
Recommended Textbook
South Western Federal Taxation 2017 Individual Income Taxes 40th Edition by William H. Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Law
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Sample Questions
Q1) Tax on transfers at death (inheritance type)
Answer: j
Q2) There is a Federal excise tax on hotel occupancy.
A)True
B)False Answer: False
Q3) When Congress enacts a tax cut that is phased in over a period of years,revenue neutrality is achieved.
A)True
B)False
Answer: False
Q4) What is a severance tax? How productive can it be in terms of generating revenue? Answer: A severance tax is one imposed when natural resources (e.g.,oil,gas,iron ore,coal)are extracted.It is based on the notion that the state has an interest in such resources.For some states,the revenue from severance taxes can be significant.Alaska,for example,relies heavily on its severance taxes and has been able to avoid both a state income tax and a general sales tax.
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Chapter 2: Working With the Tax Law
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Sample Questions
Q1) Which items tell taxpayers the IRS's reaction to certain court decisions?
A)Notices
B)Revenue Procedures
C)Revenue Rulings
D)Actions on Decisions
E)Legislative Regulations
Answer: D
Q2) Which statement is incorrect with respect to taxation on the CPA exam?
A)The CPA exam now has only four parts.
B)There are no longer case studies on the exam.
C)A candidate may not go back after exiting a testlet.
D)Simulations include a four-function pop-up calculator.
E)None of these are incorrect.
Answer: B
Q3) The "petitioner" refers to the party against whom a suit is brought.
A)True
B)False Answer: False
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Chapter 3: Tax Formula and Tax Determination an
Overview of Property Transactions
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Sample Questions
Q1) Additional standard deduction
Answer: a
Q2) Lee,a citizen of Korea,is a resident of the U.S.Any rent income Lee receives from land he owns in Korea is not subject to the U.S.income tax.
A)True
B)False Answer: False
Q3) The basic and additional standard deductions both are subject to an annual adjustment for inflation.
A)True
B)False Answer: True
Q4) A child who has unearned income of $2,100 or less cannot be subject to the kiddie tax.
A)True
B)False Answer: True
Q5) Multiple support agreement
Answer: e
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Chapter 4: Gross Income Concepts and Inclusions
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Sample Questions
Q1) In the case of a gift loan of less than $100,000,the imputed interest rules apply if the donee has net investment income of over $1,000.
A)True
B)False
Q2) Norma's income for 2016 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
Q3) On January 1,2016,Faye gave Todd,her son,a 36-month certificate of deposit she purchased December 31,2014,for $8,638.Faye gave Todd 1,000 shares of ABC,Inc. ,on December 2,2016.The certificate had a maturity value of $10,000 and the yield to maturity was 5%.On November 30,2016,ABC,Inc. ,had declared a dividend of $1.00 payable to stockholders of record on December 5th.How much interest and dividends should Todd include in his gross income for 2016?
Q4) Melissa is a compulsive coupon clipper.She often brags about the time she purchased a cart full of groceries for $5.00,when the cost without coupons would have been $50.Discuss whether Melissa realizes gross income from her coupon clipping.
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Chapter 5: Gross Income Exclusions
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Q1) The earnings from a qualified state tuition program account are deferred from taxation until they are used for qualified higher education expenses.At that time,the amount taken from the fund must be included in the gross income of the person who contributed to the account.
A)True
B)False
Q2) If an employer pays for the employee's long-term care insurance premiums,the employee can exclude from gross income the premiums but all of the benefits collected must be included in gross income.
A)True
B)False
Q3) Roger is in the 35% marginal tax bracket.Roger's employer has created a flexible spending account for medical and dental expenses that are not covered by the company's health insurance plan.Roger had his salary reduced by $1,200 during the year for contributions to the flexible spending plan.However,Roger incurred only $1,100 in actual expenses for which he was reimbursed.Under the plan,he must forfeit the $100 unused amount.His after-tax cost of overfunding the plan is $65.
A)True
B)False
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Chapter 6: Deductions and Losses in General
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Sample Questions
Q1) The cash method can be used even if inventory and cost of goods sold are an income producing factor in the business.
A)True
B)False
Q2) Iris,a calendar year cash basis taxpayer,owns and operates several TV rental outlets in Florida,and wants to expand to other states.During 2016,she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to investigate TV rental stores in Georgia.She acquires the South Carolina operations,but not the outlets in Georgia.As to these expenses,Iris should:
A)Capitalize $14,000 and not deduct $9,000.
B)Expense $23,000 for 2016.
C)Expense $9,000 for 2016 and capitalize $14,000.
D)Capitalize $23,000.
E)None of the above.
Q3) Generally,a closely-held family corporation is not permitted to take a deduction for a salary paid to a family member in calculating corporate taxable income.
A)True
B)False
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Chapter 7: Deductions and Losses Certain Business
Expenses and Losses
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Sample Questions
Q1) A theft loss of investment property is an itemized deduction not subject to the 2%-of-AGI floor.
A)True
B)False
Q2) On September 3,2015,Able,a single individual,purchased § 1244 stock in Red Corporation from his friend Al for $60,000.On December 31,2015,the stock was worth $85,000.On August 15,2016,Able was notified that the stock was worthless.How should Able report this item on his 2016 tax return?
A)$85,000 capital loss.
B)$85,000 ordinary loss.
C)$50,000 ordinary loss and $35,000 capital loss.
D)$60,000 ordinary loss.
E)None of the above.
Q3) A theft of investment property can create or increase a net operating loss for an individual.
A)True
B)False
Q4) Discuss the tax treatment of non-reimbursed losses of an employee in connection with a trade or business.
Page 9
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Chapter 8: Depreciation Cost Recovery Amortization and Depletion
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Sample Questions
Q1) During the past two years,through extensive advertising and improved customer relations,Orange Corporation estimated that it had developed customer goodwill worth $500,000.For the current year,determine the amount of goodwill Orange Corporation may amortize.
A)$16,667
B)$26,667
C)$33,333
D)$100,000
E)None of the above
Q2) For a new car that is used predominantly in business,the "luxury auto" limit depends on whether the taxpayer takes MACRS or straight-line depreciation.
A)True
B)False
Q3) Discuss the difference between the half-year convention and the mid-quarter convention.
Q4) Land improvements are generally not eligible for cost recovery.
A)True B)False
Page 10
Q5) Discuss the reason for the inclusion amount with respect to leased automobiles.
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Chapter 9: Deductions Employee and Self Employed
Related Expenses
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Sample Questions
Q1) After completing an overseas assignment in Oslo (Norway),Daniel retires from Pelican Corporation and moves to a retirement community in Key West (Florida).Daniel's moving expenses from Oslo to Key West are deductible as they are exempt from the time test.
A)True
B)False
Q2) Madison is an instructor of fine arts at a local community college.If she spends $600 (not reimbursed)on art supplies for her classes,$250 of this amount can be claimed as a deduction for AGI.
A)True
B)False
Q3) Kelly,an unemployed architect,moves from Boston to Phoenix to accept a job as a chef at a restaurant.Kelly's moving expenses are not deductible because her new job is in a different trade or business.
A)True
B)False
Q4) Once set for a year,when might the IRS change the rate for the automatic mileage method?
Q5) Mixed use (both business and pleasure)domestic travel.
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Chapter 10: Deduction and Losses Certain Itemized
Deductions
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Sample Questions
Q1) Harry and Sally were divorced three years ago.In July of the current year,their son,Joe,broke his arm falling out of a tree.Joe lives with Sally and Sally claims him as a dependent on her tax return.Harry paid for the medical expenses related to Joe's injury.Can Harry claim the medical expenses he paid for Joe on his tax return?
Q2) In Lawrence County,the real property tax year is the calendar year.The real property tax becomes a personal liability of the owner of real property on January 1 in the current real property tax year (assume this year is not a leap year).The tax is payable on June 1.On May 1,Reggie sells his house to Dana for $350,000.On June 1,Dana pays the entire real estate tax of $7,950 for the year ending December 31.How much of the property taxes may Reggie deduct?
A)$0
B)$2,614
C)$2,625
D)$7,950
E)None of the above
Q3) Linda is planning to buy Vicki's home.They want to keep the transaction simple,so the sales agreement will not apportion the property taxes that Vicki has already paid on the home.Comment on the tax implications for Linda and Vicki.
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Chapter 11: Investor Losses
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Sample Questions
Q1) Jack owns a 10% interest in a partnership (not real estate)in which his at-risk amount is $42,000 at the beginning of the year.During the year,the partnership borrows $80,000 on a nonrecourse note and incurs a loss of $60,000 from operations.Jack's at-risk amount at the end of the year is $44,000.
A)True
B)False
Q2) Kate dies owning a passive activity with an adjusted basis of $100,000.Its fair market value at that date is $130,000.Suspended losses relating to the property were $45,000.
A)The heir's adjusted basis is $130,000,and Kate's final deduction is $15,000.
B)The heir's adjusted basis is $130,000,and Kate's final deduction is $45,000.
C)The heir's adjusted basis is $100,000,and Kate's final deduction is $45,000.
D)The heir's adjusted basis is $175,000,and Kate has no final deduction.
E)None of the above.
Q3) Wayne owns a small apartment building that produces a $45,000 loss during the year.His AGI before considering the rental loss is $85,000.Because Wayne is an active participant with respect to the rental activity,he may deduct the $45,000 loss.
A)True
B)False
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Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) The AMT adjustment for research and experimental expenditures can be avoided if the taxpayer capitalizes the expenditures and amortizes them over a 10-year period for regular tax purposes.
A)True
B)False
Q2) A taxpayer who expenses circulation expenditures in the year incurred for regular income tax purposes will have a positive AMT adjustment in the following year.
A)True
B)False
Q3) Andrea,who is single,has a personal exemption deduction in calculating her 2016 taxable income.She has no dependency deductions.What is the amount of the AMT adjustment in calculating AMTI?
Q4) Discuss the tax year in which an AMT adjustment is first required for an ISO.
Q5) After 1993,the corporate AMT no longer applies for small C corporations. A)True
B)False
Q6) Under what circumstances are C corporations exempt from the AMT?
Q7) Why is there a need for a second tax system called the alternative minimum tax?
Q8) What tax rates apply in calculating the TMT for an individual taxpayer?
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Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) The incremental research activities credit is 20% of the qualified research expenses that exceed the base amount.
A)True
B)False
Q2) All foreign taxes qualify for the foreign tax credit.
A)True
B)False
Q3) An employer's tax deduction for wages is affected by the work opportunity tax credit.
A)True
B)False
Q4) An individual generally may claim a credit for adoption expenses in the year in which the expenses are paid.
A)True
B)False
Q5) The additional Medicare taxes assessed on high-income individuals carry differing tax rates depending on the tax base.
A)True
B)False
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Chapter 14: Property Transactions Determination of Gain and
Loss and Basic Considerations
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Sample Questions
Q1) If the amount of a corporate distribution is less than the amount of the corporate earnings and profits,the return of capital concept does not apply and the shareholders' adjusted basis for the stock remains unchanged.
A)True
B)False
Q2) Sam and Cheryl,husband and wife,own property jointly.The property has an adjusted basis of $400,000 and a fair market value of $500,000.
a.Discuss the rules for the calculation of the adjusted basis of the property to Sam if he inherits his wife's share of the property and Sam and Cheryl live in a community property state.
b.If they live in a common law state?
Q3) If a taxpayer purchases a business and the price exceeds the fair market value of the listed assets,how is the excess allocated among the purchased assets?
Q4) Explain how the sale of investment property at a loss to a brother is treated differently from a sale to a niece.
Q5) Why is it generally undesirable to pass property by death when its fair market value is less than basis?
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Chapter 15: Property Transactions Nontaxable Exchanges
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Sample Questions
Q1) Chaney exchanges a truck used in her business for making deliveries for a smaller more fuel-efficient truck to be used in her business for making deliveries.The adjusted basis for her truck is $32,000.The smaller truck has a fair market value of $33,000.In addition,Chaney receives cash of $4,000.
a.Calculate Chaney's realized and recognized gain or loss.
b.Calculate Chaney's basis for the assets she received.
Q2) Nancy and Tonya exchanged assets.Nancy gave Tonya her personal residence with an adjusted basis of $280,000 and a fair market value of $560,000.The house has a mortgage of $200,000 which is assumed by Tonya.Tonya gave Nancy a yacht used in her business with an adjusted basis of $250,000 and a fair market value of $360,000.What is Tonya's realized and recognized gain?
A)$310,000 realized and $310,000 recognized gain.
B)$310,000 realized and $0 recognized gain.
C)$110,000 realized and $110,000 recognized gain.
D)$110,000 realized and $0 recognized gain.
E)None of the above.
Q3) Libby's principal residence is destroyed by a tornado.She is single and her realized gain is $360,000.Is it possible for Libby's recognized gain to be $0?
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17
Chapter 16: Property Transactions Capital Gains and Losses
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Sample Questions
Q1) When an individual taxpayer has a net long-term capital gain that includes both 28% gain and 0%/15%/20% gain,which of these gains will be taxed first when the alternative tax on net long-term capital gain method is used and what difference does it make?
Q2) Which of the following is correct concerning short sales of stock?
A)At the time the short sale is made,the taxpayer does not deliver to the purchaser the shares sold short.
B)At the time the short sale is made,the taxpayer delivers to the purchaser the shares sold short.
C)At the time the short sale is made,the taxpayer may already own the shares sold short.
D)At the time the short sale is made,the taxpayer always already owns the shares sold short.
E)None of the above.
Q3) An individual taxpayer received a valuable painting from his uncle,a famous painter.The painter created the painting.After the taxpayer held the painting for two years,he sold it for a $400,000 gain.The gain is a long-term capital gain.
A)True
B)False
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Chapter 17: Property Transactions Section 1231 and Recapture Provisions
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Sample Questions
Q1) The maximum § 1245 depreciation recapture generally equals the accumulated depreciation.
A)True
B)False
Q2) Copper Corporation sold machinery for $47,000 on December 31,2016.The machinery had been purchased on January 2,2013,for $60,000 and had an adjusted basis of $41,000 at the date of the sale.For 2016,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.
Q3) Part III of Form 4797 is used to report gains from the sale of depreciable business equipment sold at a gain and held more than one year.
A)True
B)False
Q4) Describe the circumstances in which the potential § 1245 depreciation recapture is extinguished.
Page 19
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Chapter 18: Accounting Periods and Methods
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Q1) Generally,an advantage to using the cash method of accounting,as compared to the accrual method,is that under the cash method income is not recognized until it is collected,rather than being taxed as soon as the taxpayer has the right to collect the income.
A)True
B)False
Q2) Sandstone,Inc. ,has consistently included some factory overhead as a current expense,rather than as a cost of producing goods.As a result,the beginning inventory for 2016 is understated by $40,000.If Sandstone voluntarily changes accounting methods effective January 1,2016,the positive adjustment to the inventory is a § 481 adjustment and $10,000 must be added to taxable income for each year 2016,2017,2018,and 2019.
A)True
B)False
Q3) In 2016,T Corporation changed its tax year from ending each April 30th to ending each December 31st.The corporation earned $60,000 during the period May 1,2016 through December 31,2016.The annualized income for the short year is $90,000.
A)True
B)False
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Chapter 19: Deferred Compensation
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Sample Questions
Q1) Brown,Inc. ,uses the three-to-seven year graded vesting approach for its defined benefit retirement plan.Peter has five years of service completed as of February 5,2016,his employment anniversary date.Determine Peter's nonforfeitable percentage.
A)40%
B)60%
C)80%
D)100%
E)None of the above
Q2) Yvonne exercises incentive stock options (ISOs)for 100 shares of Apple Corporation stock at the option price of $100 per share on May 21,2016,when the fair market value is $120 per share.She sells the 100 shares of stock 3 1/2 years later for $140.Determine the recognized gain on the sale and classify it as capital or ordinary.
A)$2,000 LTCG.
B)$2,000 ordinary income.
C)$4,000 LTCG.
D)$4,000 ordinary income.
E)None of the above.
Q3) What is a highly compensated employee?
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21
Chapter 20: Corporations and Partnerships
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Q1) Alabaster Corporation,a calendar year taxpayer,was formed on July 1,2016,and incurred organizational expenditures of $52,000.Its deduction for these expenditures for 2016 can be a:
A)Maximum of $5,000.
B)Maximum of $2,000 + (6/180 × $50,000).
C)Maximum of $3,000 + (6/180 × $49,000).
D)Minimum of 6/180 × $52,000.
E)None of the above.
Q2) If a C corporation has taxable income in excess of $18,333,333,the corporate tax rate is 35% on all of its taxable income.
A)True
B)False
Q3) Upon its formation,§ 351 (transfers to controlled corporations)can apply.
Q4) Guaranteed payments have no effect on the basis of a partner's interest in the partnership.
A)True
B)False
Q5) Cannot be a shareholder in another corporation.
Q6) What causes a partner's basis in a partnership interest to fluctuate?
Q7) Estimated tax payments may have to be made.
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