Federal Income Taxation
Textbook Exam Questions
Course Introduction
Federal Income Taxation provides an in-depth study of the principles and regulations governing federal income tax law in the United States. The course examines the statutory framework, Treasury regulations, and judicial decisions that guide the determination of gross income, exclusions, deductions, credits, and the computation of taxable income for individuals and entities. Students will analyze real-life scenarios to understand income recognition, tax planning strategies, and compliance obligations. The course emphasizes the policy considerations underlying tax provisions and equips students with practical skills for applying tax rules to diverse factual situations.
Recommended Textbook
South Western Federal Taxation 2013 Comprehensive Edition by William H. Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) Timothy recently converted a warehouse into apartment lofts, which he is renting to single professionals.In making the conversion, he emphasized improvements that were portable in nature.Thus, the sprinkler system, heating and cooling units, and room dividers are all removable from the building.In terms of ad valorem property taxes, what was Timothy trying to accomplish?
Answer: When personalty is permanently attached to real estate so that its removal will cause irreparable damage, it becomes a fixture.Consequently, it ceases to be personalty and is now regarded as realty.The classification of an asset is important because different ad valorem taxes apply to realty than to personalty.For one thing, the ad valorem tax on realty is less easily avoided.Also to be considered is the possibility that the ad valorem tax on personalty (even if it cannot be avoided) could be lower than that applicable to realty.
Q2) For individual taxpayers, the interest rate for income tax refunds (overpayments) is not the same as that applicable to assessments (underpayments).
A)True
B)False
Answer: False
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Chapter 2: Working With the Tax Law
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Sample Questions
Q1) The following citation can be a correct citation: Rev.Rul.95-271, I.R.B.No.54, 18.
A)True
B)False
Answer: False
Q2) Which publisher offers the Standard Federal Tax Reporter?
A)Research Institute of America.
B)Commerce Clearing House.
C)Prentice-Hall.
D)LexisNexis.
E)None of the above.
Answer: B
Q3) Where can a researcher not find a U.S. Court of Appeals decision?
A) Federal 3d (West).
B) F. Supp. 2d Series (West).
C) AFTR (RIA).
D) USTC (CCH).
E) None of the above.
Answer: B
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Chapter 3: Computing the Tax
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Sample Questions
Q1) Married taxpayers who file separately cannot later change to a joint return.
A)True
B)False
Answer: False
Q2) As opposed to itemizing deductions from AGI, the majority of individual taxpayers choose the standard deduction.
A)True
B)False
Answer: True
Q3) Monique is a resident of the U.S.and a citizen of France. If she files a U.S.income tax return, Monique can claim the standard deduction.
A)True
B)False Answer: True
Q4) When separate income tax returns are filed by married taxpayers, one spouse cannot claim the other spouse as an exemption.
A)True
B)False Answer: False
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) The alimony rules:
A)Are based on the principle that the person who earns the income should pay the tax.
B)Permit tax deductions for property divisions.
C)Look to state law to determine the definition of alimony.
D)Distinguish child support payments from alimony.
E)None of the above.
Q2) In December 2012, Mary collected the December 2012 and January 2013 rent from a tenant.Mary is a cash basis taxpayer.The amount collected in December 2012 for the 2013 rent should be included in her 2013 gross income.
A)True
B)False
Q3) Alimony recapture may occur if there is a substantial decrease in the amount of the alimony payments in the second year.
A)True
B)False
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Chapter 5: Gross Income: Exclusions
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Q1) Fresh Bakery often has unsold donuts at the end of the day.The bakery allows employees to take the leftovers home.The employees are not required to recognize gross income because the bakery does not incur any additional cost.
A)True
B)False
Q2) Sarah's employer pays the hospitalization insurance premiums for a policy that covers all employees and retired former employees. After Sarah retires, the hospital insurance premiums paid for her by her employer can be excluded from her gross income.
A)True
B)False
Q3) If a scholarship does not satisfy the requirements for a gift, the scholarship must be included in gross income.
A)True
B)False
Q4) What Federal income tax benefits are provided for college students?
Q5) 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.)
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Chapter 6: Deductions and Losses: in General
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Q1) Alice incurs qualified moving expenses of $12,000.If she is reimbursed by her employer, the deduction is classified as a deduction for AGI.If not reimbursed, the deduction is classified as an itemized deduction.
A)True
B)False
Q2) During the year, Jim rented his vacation home for 200 days and lived in it for 19 days. During the remaining days, the vacation home was available for rental use. Is the vacation home subject to the limitation on the deductions of a personal/rental vacation home?
Q3) Which of the following can be claimed as a deduction for AGI?
A)Personal casualty losses.
B)Investment interest expenses.
C)Moving expenses.
D)Property taxes on personal use real estate.
E)None of the above.
Q4) The legal cost of having a will prepared is not deductible.
A)True
B)False
Q5) Are all personal expenses disallowed as deductions?
Q6) Are there any circumstances under which lobbying expenditures are deductible?
Page 8
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) A corporation which makes a loan to a shareholder can have a nonbusiness bad debt deduction.
A)True
B)False
Q2) For tax years beginning in 2012, the domestic production activities deduction (DPAD) for a sole proprietor is calculated by multiplying 9% times adjusted gross income.
A)True
B)False
Q3) A personal casualty loss deduction may be allowed for losses resulting from termites.
A)True
B)False
Q4) A nonbusiness bad debt deduction can be taken any year after the debt becomes totally worthless.
A)True
B)False
Q5) An NOL carryforward is not used in determining the current year's NOL.
A)True
B)False
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Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Q1) If 150% declining-balance is used, there is no straight-line switchover.
A)True
B)False
Q2) The concept of depreciation assumes that the asset has a determinable useful life.
A)True
B)False
Q3) Under the alternative depreciation system (ADS), the half-year convention must be used for personalty.
A)True
B)False
Q4) Nora purchased a new automobile on July 20, 2012, for $29,000.The car was used 60% for business and 40% for personal use.In 2013, the car was used 30% for business and 70% for personal use. Nora elects not to take additional first-year depreciation. Determine the cost recovery recapture and the cost recovery deduction for 2013.
Q5) The costs of qualified leasehold improvements qualify for additional first-year depreciation.
A)True
B)False
Page 10
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Chapter 9: Deductions: Employee and Self-Employed
Related Expenses
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Q1) Once set for a year, when might the IRS change the rate for the automatic mileage method?
Q2) Once the actual cost method is used, a taxpayer cannot change to the automatic mileage method in a later year.
A)True
B)False
Q3) Which, if any, of the following is subject to the cutback adjustment?
A)An airline pilot for an executive jet rental company who pays his own travel expenses.
B)Meals provided at cost to employees by a cafeteria funded by the employer.
C)Fourth of July company picnic for employees.
D)A trip to Aruba awarded to the company's top salesperson.
E)None of the above.
Q4) After she finishes working at her main job, Ann returns home, has dinner, then drives to her second job.Ann may deduct the mileage between her home and second job.
A)True
B)False
Q5) When is a taxpayer's work assignment in a new locale temporary? Permanent? What difference does it make?
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) A medical expense does not have to relate to a particular ailment to be deductible. A)True
B)False
Q2) In order to dissuade his pastor from resigning and taking a position with a larger church, Michael, an ardent leader of the congregation, gives the pastor a new car. The cost of the car is deductible by Michael as a charitable contribution.
A)True
B)False
Q3) Shirley pays FICA (employer's share) on the wages she pays her maid to clean and maintain Shirley's personal residence. The FICA payment is not deductible as an itemized deduction.
A)True
B)False
Q4) During the year, Victor spent $300 on bingo games sponsored by his church.If all profits went to the church, Victor has a charitable contribution deduction of $300.
A)True
B)False
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Chapter 11: Investor Losses
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Q1) Identify the types of income that are classified as investment income. Discuss the flexibility that a taxpayer has with respect to certain types of income that may potentially be considered investment income.
Q2) Wolf Corporation has active income of $55,000 and a passive loss of $33,000 in the current year.Wolf cannot deduct the $33,000 loss if it is a closely held C corporation that is not a personal service corporation.
A)True
B)False
Q3) Nora acquired passive activity A several years ago that until 2011 was profitable.However, the activity produced losses of $100,000 in 2011 and $50,000 in 2012.Nora had passive income from activity B of $40,000 in 2011 and $0 in 2012.How much loss is suspended from activity A in each year?
A)$60,000 in 2011 and $50,000 in 2012.
B)$100,000 in 2011 and $50,000 in 2012.
C)$0 in 2011 and $0 in 2012.
D)None of the above.
Q4) When a taxpayer disposes of a passive activity by death, what happens to any unused passive losses?
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Chapter 12: Tax Credits and Payments
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Q1) An employer's tax deduction for wages is not affected by the work opportunity tax credit.
A)True
B)False
Q2) A taxpayer's earned income credit is dependent on the number of his or her qualifying children.
A)True
B)False
Q3) In May 2008, Cindy incurred qualifying rehabilitation expenditures of $500,000 on a certified historic structure and properly claimed the tax credit for rehabilitation expenditures.In March 2012, she sold the building at a loss.Calculate the rehabilitation expenditures credit recapture that she must report in 2012.
Q4) The American Opportunity credit is available per eligible student, while the lifetime learning credit is calculated per taxpayer.
A)True
B)False
Q5) Discuss the treatment of unused general business credits.
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Chapter 13: Property Transactions: Determination of Gain or
Loss, Basis Considerations, and Nontaxable
Exchanges-Part 2
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Q1) For disallowed losses on related-party transactions, who has the right of offset?
Q2) Butch sells land with an adjusted basis of $88,000 and a fair market value of $160,000 to Cynthia, his wife, for $160,000.Discuss how the tax consequences would differ if Butch and Cynthia had never been married.
Q3) After 5 years of marriage, Dave and Janet decided to get a divorce.As part of the divorce settlement, Janet transfers to Dave the house she purchased prior to their marriage.Janet's adjusted basis for the house is $125,000 and the fair market value is $200,000 on the date of the transfer.What are the tax consequences to Janet and to Dave as a result of the transfer?
Q4) Why is it generally undesirable to pass property by death when its fair market value is less than basis?
Q5) Under what circumstances will a distribution by a corporation to its only shareholder result in a capital gain?
Q6) Maurice sells his personal use automobile at a realized loss.Under what circumstances can Maurice deduct the loss? What if the personal use asset was sold at a realized gain?
Q7) What kinds of property do not qualify under the like-kind provisions? Page 15
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Chapter 13: A: Property Transactions: Determination
of Gain or Loss, Basis Considerations, and Nontaxable Exchanges-Part 1
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Q1) Carlton purchases land for $550,000.He incurs legal fees of $10,000 and broker's commission of $28,000 associated with the purchase.He subsequently incurs additional legal fees of $25,000 in having the land rezoned from agricultural to residential.He subdivides the land and installs streets and sewers at a cost of $800,000.What is Carlton's basis for the land and the improvements?
A)$1,350,000.
B)$1,378,000.
C)$1,385,000.
D)$1,413,000.
E)None of the above.
Q2) The basis of property received by gift is always a carryover basis.
A)True
B)False
Q3) A realized loss whose recognition is postponed results in the temporary recovery of more than the taxpayer's cost or other basis.
A)True
B)False
Page 17
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Chapter 14: Property Transactions: Capital Gains and
Losses, 1231, Recapture Provisions
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Q1) White Company acquires a new machine for $35,000 and uses it in White's manufacturing operations.A few months after White places the machine in service, it discovers that the machine is not suitable for White's business.White had fully expensed the machine in the year of acquisition using § 179. White sells the machine for $5,000 in the tax year after it was acquired, but held the machine only for a total of 10 months. What was the tax status of the machine when it was disposed of and the amount of the gain or loss?
A)A capital asset and $5,000 gain.
B)An ordinary asset and $5,000 gain.
C)A § 1231 asset and $5,000 gain.
D)A § 1231 asset and $5,000 loss.
E)None of the above.
Q2) If a capital asset is sold at a loss, the holding period is important.
A)True
B)False
Q3) Property sold to a related party purchaser that is depreciable by the purchaser may cause the seller to have ordinary gain.
A)True
B)False
Page 18
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Chapter 15: Alternative Minimum Tax
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Questions
Q1) How can the positive AMT adjustment for research and experimental expenditures be avoided?
Q2) Danica owned a car that she used exclusively for business.The car was purchased in 2010 and sold in 2012 for a recognized gain of $9,000.However, the sale resulted in no AMT.Why?
Q3) Evan is a contractor who constructs both commercial and residential buildings. Even though some of the contracts could qualify for the use of the completed contract method, Evan decides to use the percentage of the completion method for all of his contracts. Therefore, no AMT adjustment is required.
A)True
B)False
Q4) Celia and Amos, who are married filing jointly, have one dependent and do not itemize deductions. They have taxable income of $82,000 and tax preferences of $53,000 in 2012. What is their AMT base for 2012?
A)$0.
B)$85,925.
C)$94,450.
D)$158,300.
E)None of the above.
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Chapter 16: Accounting Periods and Methods
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Q1) In 2012, Godfrey received a $50,000 sales commission on a long-term contract. But in 2013, the customer filed bankruptcy and Godfrey's employer was not able to collect from the customer. Under the bonus agreement, Godfrey was required to repay the employer $20,000 of the bonus. Godfrey was in the 35% marginal tax bracket in 2012 but he is in the 25% marginal tax bracket in 2013.
A)Godfrey can amend his 2012 tax return and reduce his taxable income by $20,000.
B)Godfrey should deduct the $20,000 paid in 2013 and thus his tax savings will be $5,000.
C)Godfrey can reduce his 2013 tax liability by 35% ´ $20,000 = $7,000.
D)Godfrey should not have reported the income in 2012 because of the contingencies.
E)None of the above.
Q2) 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
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Chapter 17: Corporations: Introduction and Operating Rules
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Q1) Which of the following statements is incorrect about LLCs and the check-the-box Regulations?
A)If a limited liability company with more than one owner does not make an election, the entity is taxed as a corporation.
B)All 50 states have passed laws that allow LLCs.
C)An entity with more than one owner and formed as a corporation cannot elect to be taxed as a partnership.
D)If a limited liability company with one owner does not make an election, the entity is taxed as a sole proprietorship.
E)A limited liability company with one owner can elect to be taxed as a corporation.
Q2) Adrian is the president and sole shareholder of Pigeon Corporation.He also lends money and rents a building to the corporation.Discuss how these business relationships between Adrian and Pigeon Corporation can help avoid double taxation. What limitations are there on the use of such relationships?
Q3) Briefly describe the charitable contribution deduction rules applicable to C corporations.
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Chapter 18: Corporations: Organization and Capital Structure
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Q1) For § 351 purposes, stock rights and stock warrants are included in the definition of "stock."
A)True
B)False
Q2) Five years ago, Joe, a single taxpayer, acquired stock in a corporation that qualified as a small business corporation under § 1244, at a cost of $55,000.Joe wants to give his son, Jake, $15,000 to help finance Jake's college education.The stock is currently worth $15,000.Joe is considering selling the stock in the current year for $15,000 and giving the cash to Jake.As an alternative, Joe could give the stock to Jake and let Jake sell it for $15,000.Which alternative should Joe choose?
Q3) Even if boot is generated under § 357(b) (i.e., the liability is not supported by a bona fide business purpose), the transferor shareholder may not have to recognize gain.
A)True
B)False
Q4) In a § 351 transaction, if a transferor receives consideration other than stock, the transaction can be taxable.
A)True
B)False
Page 22
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Chapter 19: Corporations: Distributions Not in Complete Liquidation
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Q1) Corporate shareholders generally receive less favorable tax treatment from a qualifying stock redemption than from a dividend distribution.
A)True
B)False
Q2) Lupe and Rodrigo, father and son, each own 50% of the stock outstanding of Heron Corporation (E & P of $400,000). During the current year, Heron redeems all of Lupe's shares for $250,000. The transaction cannot qualify as a complete termination redemption if:
A)Three years after the redemption, Lupe receives shares of stock in Heron as a gift from Rodrigo.
B)Lupe received a $250,000 note receivable from Heron in the stock redemption.
C)Lupe loaned Heron Corporation $50,000 two years following the redemption.
D)Rodrigo continued to serve on Heron Corporation's board of directors for five years following the redemption.
E)More than one of the above is correct.
Q3) How does the payment of a property dividend affect E & P?
Q4) A distribution in excess of E & P is treated as capital gain by shareholders.
A)True
B)False
Page 23
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) All of the following statements are true about corporate reorganization except:
A)Taxable amounts for shareholders are classified as a dividend or capital gain.
B)Reorganizations receive treatment similar to corporate formations under § 351.
C)The transfers of stock to and from shareholders qualify for like-kind exchange treatment.
D)The value of the stock received by the shareholder less the gain not recognized (postponed) will equal the shareholder's basis in the stock received.
E)All of the above statements are true.
Q2) What will cause the corporations involved in a § 368 reorganization to recognize gain or loss? What will cause shareholders of the companies involved in the corporate reorganization to recognize gain or loss? If gain is recognized by shareholders, what are the different tax character possibilities?
Q3) Corporate shareholders would prefer to have a gain on a reorganization treated as a dividend rather than as a capital gain, because of the dividends received deduction.
A)True
B)False
Q4) Discuss the role of letter rulings in corporate reorganizations.
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Chapter 21: Partnerships
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Q1) TEC Partners was formed during the current tax year.It incurred $10,000 of organizational expenses, $80,000 of startup expenses, and $5,000 of transfer taxes to retitle property contributed by a partner.The property had been held as MACRS property for ten years by the contributing partner, and had an adjusted basis to the partner of $300,000 and fair market value of $400,000. Which of the following statements is correct regarding these items?
A)TEC treats the contributed property as a new MACRS asset placed in service on the date the property title is transferred.
B)TEC must amortize the $10,000 of organizational expenses over 180 months.
C)TEC's startup expenses are amortized over 60 months.
D)TEC must capitalize the transfer tax and treat if as a new asset placed in service on the date the property is contributed.
E)None of the above statements are true.
Q2) A limited liability company offers all "members" protection from claims by the LLC's creditors.
A)True
B)False
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Chapter 22: S: Corporations
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Q1) An S shareholder's stock basis is reduced by flow-through losses before accounting for distributions.
A)True
B)False
Q2) A new S corporation shareholder can revoke the S election unilaterally, if he/she owns how much of the existing S corporation's stock?
A)More than 50%.
B)50% or more.
C)The election can be revoked only if all of the shareholders consent.
D)The election cannot be revoked during the first year of the new shareholder's ownership.
Q3) An S shareholder's stock basis includes a ratable share of any S corporation liabilities.
A)True
B)False
Q4) An S corporation's LIFO recapture amount equals the excess of the inventory's value under ____________________ over the ____________________ value.
Q5) How may an S corporation manage its liability for the built-in gains tax?
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Chapter 23: Exempt Entities
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Q1) 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
Q2) Miracle, Inc., is a § 501(c)(3) organization involved in medical research.Based on its expectation that proposed legislation will adversely affect the funding supporting its mission, Miracle hires a lobbyist to work in Washington to represent its views.
Q3) To maintain exempt status, an organization must do which of the following:
A)Satisfy only an organizational test.
B)Satisfy only an operational test.
C)Satisfy both an organizational test and an operational test.
D)Satisfy a financial test.
E)Once exempt status is granted, it will continue regardless of whether the organizational test and the operational test are satisfied.
Q4) Define "trade or business" for purposes of the unrelated business income tax (UBIT).
Q5) Under what circumstances are bingo games not treated as an unrelated trade or business?
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Chapter 24: Multistate Corporate Taxation
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Q1) Typically exempt from the sales/use tax base is the purchase of clothing from a neighbor's "garage sale."
A)True
B)False
Q2) Britta Corporation's entire operations are located in State A. Eighty percent ($800,000) of Britta's sales are made in A and the remaining sales ($200,000) are made in State B. B has not adopted a corporate income tax. If A has adopted a throwback rule, the numerator of Britta's A sales factor is:
A) $0.
B) $200,000.
C) $800,000.
D) $1,000,000.
Q3) State Q has adopted sales-factor-only apportionment for its corporate income tax. As a result, a ____________________ (larger/smaller) percentage of an out-of-state corporation's income is assigned to tax in the state.
Q4) In determining taxable income for state income tax purposes, the state NOL deduction typically constitutes a(n) ____________________ modification.
Q5) An ad valorem property tax is based on the asset's current ____________________.
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Chapter 25: Taxation of International Transactions
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Q1) Subpart F income includes portfolio income like dividends and interest.
A)True
B)False
Q2) RainCo, a domestic corporation, owns a number of patents related to designing umbrellas.RainCo licenses these patents to unrelated parties.TexCo, a domestic corporation, paid RainCo $100,000 in royalties related to these licenses.TexCo uses the patent information in its manufacturing process in its Canadian plant.IrishCo, an Irish corporation, paid RainCo $25,000 in royalties related to the licenses.IrishCo uses the patent information in its manufacturing process in its Michigan manufacturing plant.How much U.S.-source royalty income did RainCo earn from these licenses?
A)$0.
B)$25,000.
C)$100,000.
D)$125,000.
Q3) The U.S.system for taxing income earned inside its borders by non-U.S.persons is referred to as inbound taxation because such foreign persons are earning income by coming into the United States.
A)True
B)False
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Page 29
Chapter 26: Tax Practice and Ethics
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147 Verified Questions
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Sample Questions
Q1) Compute the failure to pay and failure to file penalties for John, who filed his 2011 income tax return on December 14, 2012, paying the $10,000 amount due.On April 1, 2012, John submitted a six-month extension of time in which to file his return; he paid no tax with the extension request.He has no reasonable cause for failing to file his return by October 15 or for failing to pay the tax that was due on April 15, 2012.John's failure to comply with the tax laws was not fraudulent.
Q2) Maria's AGI last year was $95,000.To avoid a penalty, her estimated tax payments and withholdings for this year must equal the lesser of ____________________ percent of last year's taxes or ____________________ percent of this year's taxes. or
Q3) In the case of bad debts and worthless securities, the statute of limitations on claims for refund is three years.
A)True
B)False
Q4) The IRS employs about 100,000 personnel, making it one of the largest Federal agencies.
A)True
B)False
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Page 30
Chapter 28: Income Taxation of Trusts and Estates
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145 Verified Questions
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Sample Questions
Q1) The Doyle Trust reports distributable net income for the year of $100,000 and no income from tax-exempt sources.Under the terms of the trust instrument, the trustee must distribute $30,000 to Roger and $30,000 to Sally.After payment of these amounts, the trustee is empowered to make additional distributions at its discretion.Exercising this authority, the trustee distributes an additional $25,000 to Roger and $25,000 to Sally.How much income from the trust must Sally recognize?
A)$25,000.
B)$30,000.
C)$50,000.
D)$55,000.
Q2) Your client Ming is a complex trust that operates exclusively in the U.S. Make a list of five or more tax planning opportunities that you might suggest to Ming.
Q3) Kip and his wife Biddie file calendar-year Form 1040 joint returns. Kip died this year on April 16. The Form 1040 is filed as a joint return, signed by Biddie and by Kip's executor.
A)True
B)False
Q4) The IRS encourages ____________________ filing for Forms 1041.
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