Federal Income Taxation Study Guide Questions
Course Introduction
Federal Income Taxation provides a comprehensive examination of the principles and rules governing the federal income tax system in the United States. The course explores key concepts such as gross income, deductions, exclusions, credits, computation of tax liability, and the tax treatment of individuals, corporations, partnerships, and other entities. Students will analyze statutory provisions, Treasury regulations, and relevant case law to understand how tax policies affect taxpayers and the broader economy. Practical application through problem-solving, tax return preparation, and analysis of hypothetical scenarios equips students with the foundational knowledge necessary for further study in tax law and for practical tax compliance and planning.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 2013 16th Edition by Sally Jones
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Chapter 1: Taxes and Taxing Jurisdictions
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Q1) Which of the following statements regarding tax systems is false?
A) A single percentage that applies to the entire tax base is described as a flat rate.
B) When designing a tax, governments try to identify tax bases that taxpayers can easily avoid or conceal.
C) A tax base is an item, occurrence, transaction, or activity with respect to which a tax is levied.
D) With regard to tax systems, the term revenue refers to the total tax collected by the government.
Answer: B
Q2) Which of the following statements about Treasury regulations is false?
A) Treasury regulations are written to interpret and explain the Internal Revenue Code.
B) Treasury regulations are part of the statutory law.
C) A federal court can invalidate a Treasury regulation if the court concludes that the regulation incorrectly interprets the Internal Revenue Code.
D) None of the above is false.
Answer: B
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Chapter 2: Policy Standards for a Good Tax
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Q1) Congress originally enacted the federal estate and gift taxes to improve:
A) Distributional justice
B) Economic efficiency
C) Vertical equity
D) Horizontal equity
Answer: A
Q2) Which of the following statements regarding a convenient tax is false?
A) From the government's viewpoint, a good tax should be convenient to administer.
B) From the taxpayer's viewpoint, a good tax should be convenient to pay.
C) A convenient tax should have a method of collection that offers maximum opportunity for noncompliance.
D) A convenient tax should permit taxpayers to compute their tax with reasonable certainty without incurring undue costs.
Answer: C
Q3) The Internal Revenue Service's cost of collecting $100 of tax revenue is about $3.
A)True
B)False
Answer: False
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Chapter 3: Taxes As Transaction Costs
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Q1) Which of the following statements concerning related party transactions is true?
A) The federal tax law prohibits related party transactions.
B) Related parties enjoy significant flexibility in controlling the tax consequences of their transactions.
C) Related party transactions can never reflect an arm's length standard.
D) The IRS always disallows any favorable tax consequences of related party transactions.
Answer: A
Q2) The present value of a dollar available in a future period increases as the discount rate increases.
A)True
B)False
Answer: False
Q3) When the tax law applies differentially to transaction alternatives, decisions should focus on before-tax earnings.
A)True
B)False
Answer: False
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Chapter 4: Maxims of Income Tax Planning
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Q1) Mrs. Jax plans to pay $100,000 for one of three investment alternatives that have the same risk. The income from investment 1 would be taxed at Mrs. Jax's 30% regular tax rate, the income from investment 2 would be taxed at a 20% preferential rate, and the income from investment 3 is tax-exempt. The investments offer the following before-tax yields. Investment 1: 8.25%
Investment 2: 7.5%
Investment 3: 6.0%
Which investment should Mrs. Jax select?
A) Investment 1
B) Investment 2
C) Investment 3
D) Mrs. Jax is neutral between investment 2 and investment 3.
Q2) The entity variable is important because the amount of taxable income generated by a business depends on the type of entity conducting the business.
A)True
B)False
Q3) Deduction-shifting transactions usually occur between unrelated taxpayers.
A)True
B)False
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Page 6
Chapter 5: Tax Research
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Q1) Which of the following is not generally included in a tax research memorandum?
A) A statement of the pertinent facts
B) An analysis of the relevant sources of authority
C) The details of any advice given to the client as part of the research engagement
D) A bill for fees charged to the client for the research engagement
Q2) The first step in the tax research process is to locate relevant tax law authority.
A)True
B)False
Q3) Which of the following is not primary authority on which to base research conclusions?
A) Journal of Taxation article written by a professor.
B) Revenue ruling.
C) U.S. Tax Court decision.
D) U.S. Supreme Court decision.
Q4) The final step in the tax research process is to document and communicate research conclusions.
A)True
B)False
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Chapter 6: Taxable Income From Business Operations
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Q1) A permanent difference between book income and taxable income affects only one taxable year.
A)True
B)False
Q2) An accrual basis taxpayer that accrues a liability at year-end for unpaid state income tax can deduct the accrued tax expense in the computation of federal taxable income.
A)True
B)False
Q3) Murray Inc., a calendar year, accrual basis corporation, accrued $946,000 accrued salary and wage expense at the end of 2012. Murray paid the entire amount of the accrued liability on January 13, 2013. Murray can deduct the entire $946,000 accrued expense in 2012.
A)True
B)False
Q4) Which of the following does not result in a permanent book/tax difference?
A) Tax-exempt interest on state and local bonds
B) NOL carryforwards
C) Domestic production activities deduction
D) Lobbying expenses
8
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Q1) Research and experimental expenditures are deductible unless they result in the development of a patented formula or process.
A)True
B)False
Q2) The capitalized cost of tangible leasehold improvements is amortizable over the term of the lease.
A)True
B)False
Q3) The after-tax cost of an expenditure is minimized when the expenditure is deductible in the current year.
A)True
B)False
Q4) The difference between the before-tax cost and after-tax cost of an asset equals the net present value of the tax savings from any cost recovery deductions with respect to the asset.
A)True B)False
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Chapter 8: Property Dispositions
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Q1) A taxpayer that is using the installment sale method to recognize gain must recompute the gross profit percentage every year during the term of the installment note.
A)True
B)False
Q2) Oslego Company, a calendar year taxpayer, sold land with a $400,000 tax basis for $635,000 in March 2012. The purchaser paid $50,000 cash at closing and gave Oslego an interest-bearing note for the $585,000 remaining price. In September, Oslego received $50,450 cash from the purchaser consisting of a $29,250 principal payment and a $21,200 interest payment. Assuming that Oslego does not elect out of the installment sale method, compute the company's 2012 gain recognized on sale and its tax basis in the note receivable on December 31.
Q3) Both corporate and individual taxpayers can carry back a net capital loss to the three prior taxable years.
A)True
B)False
Q4) The sale of business inventory always generates ordinary income or loss.
A)True
B)False
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Chapter 9: Nontaxable Exchanges
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Q1) A partnership always takes a carryover basis in property received from a partner in exchange for an equity interest in the partnership.
A)True
B)False
Q2) Itak Company transferred an old asset with a $44,300 adjusted tax basis in exchange for a new asset worth $48,000 and $3,000 cash. Which of the following statements is false?
A) If the exchange is taxable, Itak recognizes a $6,700 gain.
B) If the exchange is nontaxable, Itak recognizes a $3,000 gain.
C) If the exchange is nontaxable, Itak's tax basis in the new asset is $44,300.
D) None of the statements is false.
Q3) Yelano Inc. exchanged an old forklift used in its business for a new forklift. This like-kind exchange is nontaxable.
A)True B)False
Q4) A taxpayer who realizes a loss on the exchange of like-kind property can elect to recognize the loss.
A)True B)False
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Chapter 10: Sole Proprietorships, Partnerships, Llcs, and S Corporations
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Q1) XYZ, Inc. wishes to make an election to become an S corporation for federal tax purposes. Which of the following statements regarding the election is false?
A) All of the corporation's shareholders must consent to make an S election.
B) If a shareholder in an S corporation sells his shares of stock to a nonresident alien, the election will terminate.
C) If an S corporation loses its election, the shareholders cannot make a new election for five years without IRS consent.
D) All of the shareholders must consent to voluntarily terminating an S election.
Q2) Randolph Scott operates a business as a sole proprietorship. This year his net profit was $10,570. For tax purposes this amount should be reported on:
A) Schedule C, Statement of Profit or Loss from Business
B) The first page of Form 1040 as other income
C) A separate tax return prepared for the business operation
D) Schedule E, Statement of Rent and Royalty Income
Q3) Corporations cannot be shareholders in an S corporation.
A)True
B)False
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Chapter 11: The Corporate Taxpayer
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Q1) Calliwell Corporation is a Colorado corporation engaged in the manufacture and sale of computer components. In 2012, it earned $2 million of net income from this qualified activity. Before the domestic production activities deduction, its taxable income is $2,100,000 and compensation paid to its U.S. workforce is $670,000. Its 2012 taxable income is:
A) $1,820,000
B) $1,920,000
C) $1,260,000
D) $1,914,000
Q2) In determining the incidence of the corporate income tax:
A) Corporations may pass the tax burden onto consumers in the form of higher prices
B) Corporate shareholders may bear the burden of the corporate tax in the form of lower return on investment
C) Corporate employees may bear the burden of the corporate tax in the form of lower compensation
D) All of the above parties may bear the indirect burden of the corporate income tax
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Chapter 12: The Choice of Business Entity
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Q1) Which of the following statements regarding the accumulated earnings tax is true?
A) The accumulated earnings tax is imposed instead of the regular corporate income tax.
B) The accumulated earnings tax is intended to coerce corporations to pay dividends.
C) The accumulated earnings tax is calculated by the corporation and paid on its annual corporate income tax return.
D) All of the above statements are true.
Q2) Mr. Eddy loaned his solely-owned corporation $3,000,000. The corporation paid a market rate of interest annually. Upon audit, the IRS reclassified some of the debt as equity. Which of the following statements is true?
A) The interest paid by the corporation on the reclassified amount is treated as a dividend.
B) The taxable income of the corporation should stay the same.
C) Mr. Eddy's taxable income will increase by the amount of the reclassified debt.
D) None of the statements is true.
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Chapter 13: Jurisdictional Issues in Business Taxation
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Q1) Which of the following statements about the foreign tax credit is true?
A) The foreign tax credit allows U.S. companies to defer U.S. tax on foreign source income.
B) The foreign tax credit is available to foreign corporations doing business in the U.S.
C) The foreign tax credit is allowed for all types of foreign taxes.
D) By permitting a foreign tax credit, the U.S. relinquishes its taxing jurisdiction on foreign source income earned by U.S. corporations to the extent that income is taxed by a foreign jurisdiction.
Q2) Chester, Inc., a U.S. multinational, earns income in three foreign countries. Country A has a 25% income tax, Country B has a 35% income tax, and Country C has a 45% income tax. In which of these countries could Chester lower its world-wide tax liability by operating through a foreign subsidiary rather than a domestic subsidiary? Assume the foreign subsidiary will reinvest all after-tax earnings rather than paying dividends.
A) Country A
B) Country B
C) Country C
D) All three countries
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Chapter 14: The Individual Tax Formula
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Q1) An extension of the time to file an individual tax return also extends the time to pay any balance of tax due with the return.
A)True
B)False
Q2) Melissa, age 16, is claimed as a dependent on her parents' tax return. This year, Melissa earned $510 from babysitting and $220 interest income from a savings account. Compute Melissa's standard deduction.
A) $730
B) $810
C) $520
D) $950
Q3) Mr. and Mrs. Lansing, who file a joint tax return, have four dependent children under age 17. Which of the following statements is false?
A) If the Lansings' AGI is $77,900, their child credit is $4,000.
B) If the Lansings' AGI is $127,300, their child credit is $3,100.
C) If the Lansings' AGI is $196,000, their child credit is zero.
D) None of the above is false.
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Chapter 15: Compensation and Retirement Planning
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Q1) Mr. Thano, age 47, withdrew $22,000 from his employer-sponsored qualified retirement plan to pay for his daughter's wedding. Compute the tax cost of the withdrawal if Mr. Thano has a 28% marginal tax rate on ordinary income.
A) $2,200
B) $6,160
C) $8,360
D) $11,000
Q2) Ms. Jorland is a 30-year old single taxpayer. Her $3,760 AGI is the total of $7,940 interest and dividend income from a trust fund, $4,190 income from a rent property, and an $8,370 loss from a new business that she started this year. Compute Ms. Jorland's maximum IRA contribution.
A) $0
B) $3,760
C) $4,190
D) $5,000
Q3) Qualified withdrawals from both traditional and Roth IRAs are tax-exempt.
A)True
B)False
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Chapter 16: Investment and Personal Financial Planning
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Q1) Jane, a cash basis individual, purchased a publicly traded bond at a $6,000 market discount. Which of the following statements is true?
A) Jane must accrue the market discount as interest income over the life of the bond.
B) If Jane holds the bond to maturity, she will recognize a $6,000 capital gain.
C) If Jane holds the bond to maturity, she will recognize $6,000 ordinary income.
D) None of the statements is true.
Q2) Two years ago, Mr. Young paid $40,000 to buy a publicly traded corporate bond through his broker. The bond's stated redemption value was $45,000. This year, Mr. Young sold the bond for $47,100. Compute his gain or loss on sale.
A) $2,100 long-term capital gain.
B) $7,100 ordinary income.
C) $5,000 ordinary income and $2,100 long-term capital gain.
D) $7,100 long-term capital gain.
Q3) The interest earned on investments in U.S. debt obligations is subject to state taxation.
A)True
B)False
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Chapter 17: Tax Consequences of Personal Activities
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Q1) The federal income tax system provides incentives for individual taxpayers to meet their housing needs by purchasing instead of renting a home.
A)True
B)False
Q2) Ms. Bjorn's only contribution this year was a donation of marketable securities (FMV $600,000; tax basis $273,000) to a public charity. Her AGI was $814,000. Which of the following statements is true?
A) Ms. Bjorn's charitable contribution deduction is limited to $407,000, and she has a $193,000 contribution carryover to future years.
B) Ms. Bjorn's charitable contribution deduction is $273,000.
C) Ms. Bjorn's charitable contribution deduction is limited to $407,000. The $193,000 nondeductible amount will never result in a tax benefit.
D) Ms. Bjorn's charitable contribution deduction is $600,000.
Q3) Any gain recognized on the sale of a personal residence is excluded from the seller's gross income.
A)True B)False
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Chapter 18: The Tax Compliance Process
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Q1) If the IRS assesses additional tax against a corporation after it has liquidated, the shareholders can't be held liable for the tax due.
A)True
B)False
Q2) A person can't be relieved of liability for a tax deficiency under the innocent spouse rule if that person enjoyed significant financial benefit from taxable income omitted from the return.
A)True
B)False
Q3) In which of the following is not a condition for relief of liability under the innocent spouse rule?
A) The deficiency must be attributable to erroneous items of the person's spouse.
B) The person must establish that in signing the return he or she did not know, and had no reason to know, that the return understated the correct tax.
C) Taking into account all the facts and circumstances, it is inequitable to hold the person liable for the deficiency.
D) The person is divorced from or in the process of divorcing their spouse.
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