Federal Income Taxation Study Guide Questions
Course Introduction
Federal Income Taxation is an introductory course that explores the fundamental principles and rules governing the federal income tax system in the United States. The course examines the Internal Revenue Code, Treasury regulations, and judicial decisions to analyze how income is defined, computed, and taxed for individuals, partnerships, and corporations. Topics include gross income determination, allowable deductions, tax credits, capital gains and losses, tax accounting methods, and procedural aspects such as audits and appeals. Students will apply statutory interpretation and problem-solving skills to practical scenarios, gaining a foundational understanding of tax law and its implications for tax planning and compliance.
Recommended Textbook
McGraw Hills Taxation of Individuals and Business Entities 6th Edition by Spilker
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Chapter 1: An Introduction to Tax
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Q1) In a proportional (flat) tax rate system, the marginal tax rate will always equal the average tax rate.
A)True
B)False
Answer: True
Q2) Which of the following is true regarding use taxes?
A) A use tax is relatively easy to enforce compared to a sales tax.
B) Use taxes attempt to eliminate any tax advantage of purchasing goods out of state.
C) Use taxes encourage taxpayers to buy goods out of state to avoid paying sales tax in their home state.
D) A use tax is generally a progressive tax.
E) None of these is true.
Answer: B
Q3) The two components of the tax calculation are the tax rate and the taxpayer's status.
A)True
B)False
Answer: False
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Chapter 2: Tax Compliance, the Irs, and Tax Authorities
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Q1) If a taxpayer is due a refund, she does not have to file a tax return.
A)True
B)False
Answer: False
Q2) Under the tax law, taxpayers may be subject to both civil and criminal penalties for underpaying their tax liability (e.g., due to fraud).
A)True
B)False
Answer: True
Q3) A tax practitioner can avoid IRS penalty relating to a tax return position:
A) if the position is frivolous and disclosed on the tax return.
B) if the position has a realistic possibility of being sustained by the IRS or courts.
C) if there is substantial authority to support the position.
D) if the position has a reasonable basis and is not disclosed on the tax return.
E) None of these.
Answer: C
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Chapter 3: Tax Planning Strategies and Related Limitations
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Sample Questions
Q1) Effective tax planning does not require consideration of:
A) nontax factors
B) the taxpayer's tax costs of alternative transactions
C) the other party's tax costs of alternative transactions
D) the other party's nontax costs of alternative transactions
E) None of these
Answer: E
Q2) Which of the following does not limit the benefits of deferring income?
A) increasing tax rates
B) a taxpayer with severe cash flow needs
C) if continuing an investment would generate a low rate of return
D) if continuing an investment would subject the taxpayer to unnecessary risk
E) None of these
Answer: E
Q3) If tax rates will be lower next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Individual Income Tax Overview, Exemptions, and Filing Status
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Sample Questions
Q1) Michael, Diane, Karen, and Kenny provide support for their mother Janet who is 75 years old. Janet lives by herself in an apartment in Los Angeles. Janet's gross income for the year is $3,000. Janet provides 10% of her own support, Michael provides 40% of Janet's support, Diane provides 8% of Janet's support, Karen provides 10% of Janet's support, and Kenny provides the remaining 32% of Janet's support. Under a multiple support agreement, who may claim a dependency exemption for Janet as a qualifying relative?
A) Michael, Diane, Karen, and Kenny
B) Michael, Karen, and Kenny
C) Michael and Kenny
D) Michael
Q2) What is the couple's gross income?
Q3) A personal automobile is a capital asset.
A)True
B)False
Q4) From AGI deductions are generally more valuable to taxpayers than for AGI deductions.
A)True
B)False
Q5) What is the couple's taxable income?
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Chapter 5: Gross Income and Exclusions
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Q1) Kathryn is employed by Acme and they have been very pleased with her performance this year. In December Kathryn was granted an extra week off with pay (pay for the week totaled $2,000). In addition, Kathryn was given tickets to a football bowl game worth $800 (Kathryn didn't use the tickets - she hates football). At year-end Kathryn was allowed to order new office furniture and Acme told her to take the old office furniture home. The office furniture was originally purchased for $7,000, but it was fully depreciated and only worth about $1,000. Determine the amount Kathryn should include in her gross income.
Q2) The tax law defines alimony to include transfers of property (but not cash) between former spouses.
A)True
B)False
Q3) Brad was disabled for part of the year and he received $11,500 of benefits from a disability plan purchased by Brad's employer. Brad must include all $11,500 of benefits in his gross income because Brad was not taxed on the disability insurance premiums paid by his employer.
A)True
B)False
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Chapter 6: Individual Deductions
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Q1) Taxpayers are allowed to deduct mortgage interest on up to $1,000,000 of acquisition debt for their qualified residence and on up to $500,000 of home-equity debt.
A)True
B)False
Q2) In general, taxpayers are allowed to deduct the fair market value of capital gain property on the date of the donation to a qualified charitable organization.
A)True B)False
Q3) Bryan is 67 years old and lives alone. This year he has received $25,000 in taxable interest and pension payments, and he has paid the following expenses: \(\begin{array}{llcc}
\text { Real estate taxes } & \$1,640\\
\text {Medical expenses ( \$ 2,000 was reimbursed by insurance) } &3,650\\
\text {Charitable contributions (cash to the Unity church) } &460\\ \end{array}\)
If Bryan files single with one personal exemption, calculate his taxable income.
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Page 8
Chapter 7: Individual Income Tax Computation and Tax Credits
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Sample Questions
Q1) Allen Green is a single taxpayer with an AGI (and modified AGI) of $210,000, which includes $170,000 of salary, $25,000 of interest income, $10,000 of dividends, and $5,000 of long-term capital gains. What is Allen's Net Investment Income tax liability this year, rounded to the nearest whole dollar amount?
A) $2,465
B) $1,520
C) $570
D) $380
Q2) Harmony reports a regular tax liability of $15,000 and tentative minimum tax of $17,000. Given just this information, what is her alternative minimum tax liability for the year?
A) $0
B) $2,000
C) $15,000
D) $17,000
Q3) Employees must pay both Social Security tax and Medicare tax on all of their wages no matter the amount of their wages.
A)True
B)False
Page 9
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Chapter 8: Business Income, Deductions, and Accounting Methods
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Q1) Jim operates his business on the accrual method and this year he received $4,000 for services that he intends to provide to his clients next year. Under what circumstances can Jim defer the recognition of the $4,000 of income until next year?
A) Jim can defer the recognition of the income if he absolutely promises not to provide the services until next year.
B) Jim must defer the recognition of the income until the income is earned.
C) Jim can defer the recognition of the income if he has requested that the client not pay for the services until the services are provided.
D) Jim can elect to defer the recognition of the income if the income is not recognized for financial accounting purposes.
E) Jim can never defer the recognition of the prepayments of income.
Q2) A short tax year can end on any day of any month other than December.
A)True
B)False
Q3) A fiscal tax year can end on the last day of any month other than December.
A)True
B)False
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Chapter 9: Property Acquisition and Cost Recovery
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Sample Questions
Q1) Poplock LLC purchased a warehouse and land during the current year for $350,000. The purchase price was allocated as follows: $275,000 to the building and $75,000 to the land. The property was placed in service on August 12. Calculate Poplock's maximum depreciation for this first year, rounded to the nearest whole number:
A) $2,648
B) $3,371
C) $3,751
D) $4,774
E) None of these
Q2) Taxpayers may always expense a portion of start-up costs and organizational expenditures.
A)True
B)False
Q3) Business assets that tend to be used for both business and personal purposes are referred to as listed property.
A)True
B)False
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Chapter 10: Property Dispositions
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Sample Questions
Q1) Which of the following realized gains results in a recognized gain?
A) Farm machinery traded for farm machinery.
B) Sale to a related party.
C) Involuntary conversion.
D) Iowa cropland exchanged for a Minnesota warehouse.
Q2) Collins Corporation, of Camden, Maine, wants to exchange its manufacturing equipment for Rockland Company's equipment. Both parties agree that Collins's machinery is worth $200,000 and that Rockland's machinery is worth $175,000. Collins will not enter into the transaction unless it qualifies as a like-kind exchange. If Collins wants to avoid gain, what could the parties do to equalize the value exchanged but still allow the exchange to qualify as a like-kind exchange?
Q3) A parcel of land is always a capital asset.
A)True
B)False
Q4) For corporations, §291 recaptures 20 percent of the lesser of depreciation taken or the realized gain as ordinary income.
A)True
B)False
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Page 12
Chapter 11: Investments
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Sample Questions
Q1) When considering tax-favored investments, taxpayers must not only look at explicit taxes but also implicit taxes to properly compare them with other less favorably taxed investments. Generally speaking, how do explicit and implicit taxes affect the investment decisions of high and low marginal rate taxpayers?
Q2) When a bond is purchased in the secondary bond market at a discount, the amount of discount treated as interest income when the bond is sold prior to maturity is the:
A) market premium
B) market discount
C) accrued market premium
D) accrued market discount
E) None of these
Q3) On January 1, 20X8, Jill contributed $18,000 of cash to the XYZ limited partnership for a 25 percent limited partnership interest. On April 6, 20X8, XYZ, limited partnership distributed $2,000 to Jill. For the year ended December 31, 20X8, Jill received the following income/loss allocations from her partnership investments: (1) XYZ, limited partnership allocated a $5,000 loss to Jill (2) ABC limited partnership allocated $2,300 of income to Jill. How much of the $5,000 loss from XYZ limited partnership can Jill deduct in 20X8?
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Chapter 12: Compensation
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Q1) One purpose of Form W-4 is to determine an employee's withholding.
A)True
B)False
Q2) When stock options are exercised they are converted into actual employer stock.
A)True
B)False
Q3) Which of the following is false regarding dependent care expenses?
A) Up to $5,000 of reimbursed expenses can qualify.
B) Employers may discriminate among employees.
C) Dependent children under 13 qualify.
D) Spouses who are physically or mentally unable to care for themselves qualify.
Q4) Which of the following regarding the Form W-4 is incorrect?
A) Determines an employee's income tax withholding.
B) Employees can claim more allowances than personal exemptions that will be claimed.
C) Employees can specify additional amounts to be withheld each month.
D) The form can only be adjusted at the beginning of year or start of employment.
Q5) Big Bucks paid its CEO $1,500,000 of compensation for the year. What is the after-tax cost of paying the salary assuming a 30 percent marginal tax rate?
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Chapter 13: Retirement Savings and Deferred Compensation
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Q1) Kathy is 60 years of age and self-employed. During the year she reported $400,000 of revenues and $100,000 of expenses relating to her self-employment activities. If Kathy has no other retirement accounts in her name, what is the maximum amount she can contribute this year to a simplified employee pension (SEP) IRA?
A) $52,000
B) $57,500
C) $57,746
D) $288,729
Q2) An employer may contribute to an employee's traditional 401(k) account but the employer may not contribute to an employee's Roth 401(k) account.
A)True
B)False
Q3) Employees who are at least 50 years old at the end of the year are allowed to contribute more to their 401(k) accounts than employees who are not 50 years old by year end.
A)True
B)False
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Chapter 14: Tax Consequences of Home Ownership
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Q1) The ownership test for excluding gain on the sale of a principal residence requires the taxpayer to have owned the property for three or more years during the five year period ending on the date of sale.
A)True
B)False
Q2) Shantel owned and lived in a home for five years before marrying Daron. Shantel and Daron lived in the home for two years before selling it at a $700,000 gain. Shantel was the sole owner of the residence until it was sold. How much of the gain may Shantel and Daron exclude?
A) $0
B) $250,000
C) $500,000
D) $700,000
Q3) Alison Jacobs (single) purchased a home in Las Vegas, Nevada for $400,000. She moved into the home on September 1, year 0. She lived in the home as her primary residence until July 1 of year 4 when she sold the home for $675,000. If Alison's marginal ordinary tax rate is 25% what amount of tax will Alison pay on the $275,000 gain?
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Chapter 15: Entities Overview
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Q1) When an employee/shareholder receives an income allocation from an S corporation, what taxes apply to the income allocation?
A) FICA tax only.
B) Self-employment tax only.
C) FICA and self-employment tax.
D) None of these. This income will never be taxed.
E) None of these. This income will be taxed, but another type of tax will apply.
Q2) In its first year of existence Aspen Corp. (a C corporation) reported a loss for tax purposes of $50,000. In year 2, it reports a $30,000 loss. For year 3, it reports taxable income from operations of $120,000. How much tax will Aspen Corp. pay for year 3? Consult the corporate tax rate table provided to calculate your answer.
Q3) Shareholders of C corporations receiving property distributions must recognize dividend income equal to the fair market value of the distributed property if the distributing corporation has sufficient earnings and profits.
A)True
B)False
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Chapter 16: Corporate Operations
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Q1) In 2011, Smith Traders Inc. reported taxable income of $100,000. In 2012, it reported taxable income of $15,000. In 2013, it reported taxable income of $95,000. In 2014, Smith Traders experienced a net operating loss of $25,000. What amount of refund can Smith Traders receive if it does not elect to forgo the carry back (see the corporate income tax schedule)?
Q2) An unfavorable temporary book-tax difference is so named because it causes taxable income to decrease relative to book income.
A)True
B)False
Q3) A nonqualified stock option will create a permanent book-tax difference in a given year if it vests during the year but is exercised in a later year.
A)True
B)False
Q4) A corporation with a minimum tax credit carryover may reduce regular tax down to the amount of its tentative minimum tax when its regular tax exceeds its tentative minimum tax.
A)True
B)False
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Chapter 17: Accounting for Income Taxes
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Q1) Izzo Company reported pretax net income from continuing operations of $1,000,000 and taxable income of $800,000. The favorable book-tax difference of $200,000 was due to a $100,000 favorable temporary difference relating to depreciation, an unfavorable temporary difference of $50,000 due to accrued vacation pay, and a $150,000 favorable permanent difference from the domestic manufacturing deduction. Izzo Company's applicable tax rate is 34%.
a. Compute Izzo Company's current income tax expense.
b. Compute Izzo Company's deferred income tax expense or benefit.
c. Compute Izzo Company's effective tax rate.
d. Provide a reconciliation of Izzo Company's effective tax rate with its hypothetical tax rate of 34%.
Q2) In general, a temporary difference reflects a difference in the financial basis and tax basis of an asset or liability on the balance sheet.
A)True B)False
Q3) Temporary differences that are cumulatively "favorable" are defined as taxable temporary differences.
A)True B)False
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Chapter 18: Corporate Taxation: Nonliquidating Distributions
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Q1) Tammy owns 60 percent of the stock of Huron Corporation. Unrelated individuals own the remaining 40 percent. For a stock redemption to be treated as an exchange under the "substantially disproportionate" rule, Tammy must reduce her stock ownership to below 48 percent.
A)True
B)False
Q2) Which of these items is not an adjustment to taxable income or net loss to compute current E&P?
A) Dividends received deduction
B) Tax-exempt income
C) Net capital loss carryforward from the prior year tax return
D) Refund of prior year taxes for an accrual method taxpayer
Q3) Brothers and sisters are considered "family" under the stock attribution rules that apply to stock redemptions.
A)True
B)False
Q4) The term "earnings and profits" is well defined in the Internal Revenue Code.
A)True
B)False
20
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Chapter 19: Corporate Formation, Reorganization, and Liquidation
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Q1) Jalen transferred his 10 percent interest to Wolverine Company as part of a complete liquidation of the company. In the exchange, he received land with a fair market value of $100,000. Jalen's basis in the Wolverine stock was $50,000. The land had a basis to Wolverine Company of $80,000. What amount of gain does Jalen recognize in the exchange and what is his basis in the land he receives?
A) $50,000 gain recognized and a basis in the land of $100,000
B) $50,000 gain recognized and a basis in the land of $80,000
C) No gain recognized and a basis in the land of $80,000
D) No gain recognized and a basis in the land of $50,000
Q2) Gain and loss realized in a section 351 transaction will be recognized if the taxpayer receives boot in the exchange.
A)True
B)False
Q3) In December 2011, Jill incurred a $50,000 loss on the sale of Crown Corporation stock that she purchased in 2005. The stock satisfied all of the §1244 stock requirements at the time of issue. Jill is married to Jack and together they file a joint tax return. How much of the loss can Jack and Jill deduct in 2011, assuming they do not have capital gains in the current or prior years, and what is the character of the loss?
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Chapter 20: Forming and Operating Partnerships
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Q1) Erica and Brett decide to form their new motorcycle business as a LLC. Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members' contributions, their LLC will obtain a $50,000 nonrecourse loan from First Bank at the time it is formed. Brett contributes cash of $5,000 and a building he bought as a storefront for the motorcycles. The building has a FMV of $45,000, an adjusted basis of $30,000, and is secured by a $35,000 nonrecourse mortgage that the LLC will assume. What is Brett's outside tax basis in his LLC interest?
A) $37,500
B) $40,000
C) $42,500
D) $45,000
Q2) The character of each separately-stated item is determined at the partner level.
A)True
B)False
Q3) Explain why partners must increase their tax basis for their share of partnership taxable and nontaxable income or gain and reduce their basis by their share of partnership deductible and nondeductible expenses or losses?
Q4) What is the difference between a partner's tax basis and at-risk amount?
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Chapter 21: Dispositions of Partnership Interests and Partnership Distributions
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Q1) Which of the following statements regarding hot assets for purposes of disproportionate distributions is false?
A) Hot assets include unrealized receivables.
B) Hot assets include all inventory.
C) Hot assets include substantially appreciated inventory.
D) The definition of hot assets for distributions and sales of partnership interests differs.
Q2) Which of the following statements regarding disproportionate distributions is false?
A) A disproportionate distribution occurs when a partner receives more than his proportionate share of the partnership's hot assets.
B) A disproportionate distribution occurs when a partner receives less than his proportionate share of the partnership's hot assets.
C) The tax provisions related to disproportionate distributions attempt to preserve the partners' share of ordinary income potential.
D) Disproportionate distributions will only occur in liquidating distributions.
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Chapter 22: S Corporations
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Q1) S corporations recognize gains and losses on distributions of property.
A)True
B)False
Q2) Like partnerships, S corporations determine their accounting periods and make accounting method elections at the entity level.
A)True
B)False
Q3) SoTired, Inc., a C corporation with a June 30 year-end, elects S corporation status this year. Assuming no special elections, SoTired, Inc. will continue to use a June 30 year-end as an S corporation.
A)True
B)False
Q4) Which of the following would not result in an S election termination?
A) Having 120 unrelated shareholders.
B) Having a corporation as a shareholder.
C) Issuing a second class of stock.
D) Having excess passive investment income for two consecutive years.
E) None of these.
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Page 24
Chapter 23: State and Local Taxes
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Q1) Which of the following is not one of the Complete Auto Transit's criteria for whether a state can tax nondomiciliary companies?
A) Protected activities are exempt.
B) A sufficient connection exists.
C) Only a fair portion of income can be taxed.
D) Tax cannot discriminate against nondomiciliary businesses.
Q2) Roxy operates a dress shop in Arlington, Virginia. Lisa, a Maryland resident, comes in for a measurement and purchases a $1,500 dress. Lisa returns to Virginia a few weeks later to pick up the dress and drive it back to her Maryland residence where she will use the property. Assuming that Virginia's sales tax rate is 5 percent and that Maryland's sales tax rate is 6 percent, what is Roxy's sales and use tax liability?
A) $0.
B) $75 to Virginia.
C) $75 sales tax to Virginia and $15 use tax to Maryland.
D) $90 to Maryland.
Q3) Most services are sourced to the state where the services were performed.
A)True
B)False
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25
Chapter 24: The US Taxation of Multinational Transactions
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Q1) Which of the following tax benefits does not arise when a U.S. corporation forms a corporation in Ireland through which to earn business profits in Ireland?
A) Potential deferral of U.S. tax on income earned by the corporation.
B) Treaty benefits on cross border payments between the Irish corporation and the U.S. corporation.
C) Use of transfer pricing to shift income between the United States and Ireland.
D) Flow-through of losses from the Irish corporation to the tax return of the U.S. corporation.
Q2) Provo Corporation received a dividend of $350,000 from its 100 percent owned German subsidiary. A deemed paid credit of $150,000 was available on the dividend. No withholding tax was imposed on the dividend. What are the U.S. tax consequences to Provo on receipt of the dividend, assuming the foreign tax credit limitation is not binding and the company breaks even on its U.S. operations? Assume a U.S. tax rate of 34 percent.
A) Taxable income of $350,000 and a net U.S. tax liability of $0
B) Taxable income of $350,000 and a net U.S. tax liability of $20,000
C) Taxable income of $500,000 and a net U.S. tax liability of $170,000
D) Taxable income of $500,000 and a net U.S. tax liability of $20,000
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Chapter 25: Transfer Taxes and Wealth Planning of the Cfa Institute
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Q1) Gabriel had a taxable estate of $6 million when he died in 2014. Calculate the amount of estate tax due (if any) if Gabriel made prior taxable gifts in 2005 totaling $1 million at which time he claimed a unified credit of $1 million and paid no tax. Gabriel was unmarried at his death.
Q2) The theft of property included in the gross estate is only deductible in calculating the taxable estate if the loss exceeds 10 percent of the decedent's adjusted gross estate.
A)True
B)False
Q3) Which of the following is a true statement?
A) A remainder interest held by the decedent at the time of death is not included in the decedent's gross estate.
B) The value of a remainder interest depends in part on the Section 7520 interest rate at the time of death.
C) The value of a remainder interest in a life estate is independent of the age of the life tenant.
D) The value of a life estate does not depend upon the age of the life tenant.
E) None of these is true.
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