Federal Taxation
Chapter Exam Questions
Course Introduction
Federal Taxation provides an in-depth examination of the principles and practices governing the U.S. federal tax system. Students will explore the framework of federal income taxation as it applies to individuals, partnerships, and corporations, including income determination, deductions, credits, and the roles of the Internal Revenue Service and tax law statutes. Emphasis is placed on tax planning, compliance, and ethical considerations, with practical applications to real-world scenarios, preparing students for advanced coursework or professional roles in accounting and financial management.
Recommended Textbook
Concepts in Federal Taxation 2018 25th Edition by Kevin E. Murphy
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Page 2
Chapter 1: Conceptual Foundations of Tax Law
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Sample Questions
Q1) Elrod is an employee of Gomez Inc.During 2017,Elrod receives a salary of $120,000 from Gomez.What amount should Gomez withhold from Elrod's salary as payment of Elrod's social security and medicare taxes?
A)$7,440.00
B)$7,803.40
C)$8,422.65
D)$9,087.00
E)$9,180.00
Answer: E
Q2) Tax planning involves the timing of income and deductions.General rules of thumb to follow when planning include
I.putting income into the year with the lowest marginal tax rate.
II.deferring deductions.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Answer: A
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Page 3
Chapter 2: Income Tax Concepts
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Q1) Occasionally,realized gains are not recognized for tax purposes.These situations occur because
I.certain gains are excluded due to legislative grace.
II.gains are deferred on certain types of property transactions where the wherewithal-to-pay the tax resulting from the transaction is lacking.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Answer: C
Q2) An individual can legally assign income to another individual,and the assignment relieves the owner of the income from paying tax on the income.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Income Sources
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Sample Questions
Q1) Al and Peggy divorce in the current year.As part of their divorce agreement,Peggy is to pay Al $70,000 for his share of their home (the home's fair market value is $140,000).Also,Peggy agrees to pay Al $1,000 monthly.The payment represents the financial support for their 15-year-old son,Bud.It will cease upon Bud's 23<sup>rd</sup> birthday or college graduation-whichever comes first.Which of the following explain(s)the tax effects of these events?
I.Peggy can deduct $12,000 annually for the monthly payments made this year.
II.Al does not recognize the $1,000 monthly payments as income.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Answer: B
Q2) The holding period for receiving long-term capital gain treatment is more than 12 months.
A)True
B)False
Answer: True
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Chapter 4: Income Exclusions
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Sample Questions
Q1) Fanny's employer has a qualified pension plan.The employer makes all payments into the plan;employees do not contribute to the plan.During the current year,the employer pays $4,000 into the plan on Fanny's behalf.The plan also earns $3,000 during the year on the balance in Fanny's retirement account.Which of the following statements is true?
I.Fanny is not taxed on the $4,000 in the current year.
II.Fanny is not taxed on the $3,000 in the current year.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Clarance rented office space to an attorney who left town before the lease was completed.The attorney left several bookcases and other improvements to cover the remaining rent.Clarance must include in income the value of the leasehold improvements to the extent of the remaining rent that was due.
A)True
B)False
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Chapter 5: Introduction to Business Expenses
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Q1) Which of the following is/are trade or business expenses?
I.Mahlon incurs expenses related to investing in stocks and bonds.Mahlon is a Sociology professor at State University but spends 10-15 hours per week on his investments.Almost 2/3 of Mahlon's annual income comes from his investments as dividends and interest.
II.Shaheen has expenses related to managing her portfolio of securities.The short-term trading of her securities generates most of her annual income.She has no other job.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) To be deductible,the dominant motive for incurring an expense must be
A)the relationship to a business activity.
B)to reduce income taxes.
C)tax avoidance.
D)the intent to earn a profit.
E)personal.
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Chapter 6: Business Expenses
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Q1) Discovery,Inc. ,a cash-basis consulting firm,can deduct a twelve-month insurance premium in the year the premium is paid even though the policy remains in effect into the following year.
A)True
B)False
Q2) Laura and Jason are married and have 3 children ages 2,6,and 8.Their adjusted gross income for the year is $95,000.The maximum they can contribute to their children's Coverdell Education Savings Accounts is
A)$- 0 -
B)$667
C)$1,500
D)$2,000
E)$6,000
Q3) The actual cost method is a more-flexible way to compute the auto expense deduction and often results in a larger tax savings.
A)True
B)False
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Page 8
Chapter 7: Losses -- Deductions and Limitations
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Q1) Ronald is exploring whether to open a franchise of Quick Tax.He plans on forming an S corporation and investing $15,000 of his own money while borrowing $45,000 from the bank to finance the purchase of the necessary computing equipment and software.The bank has proposed two financing options.Under the first option,the interest rate is only 10%,but the loan is recourse.The second option increases the interest rate to 15%,but the loan is nonrecourse.
a.Discuss the tax and non-tax aspects of the two options.
b.If Ronald incurs a $20,000 loss in the first year of operations,how much,if any,of the loss can he deduct if the loan is recourse? Nonrecourse?
Q2) Frasier sells some stock he purchased several years ago for $10,000 to his brother,Niles,for $6,000.
I.If this is Frasier's only stock transaction,he can deduct only $3,000 of the loss.
II.If Niles sells the stock for $10,000,his taxable gain is $4,000.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
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Chapter 8: Taxation of Individuals
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Sample Questions
Q1) Which of the following properties from an income tax standpoint will be the best one for Juan to contribute to his favorite charity?
A)Stock acquired in 1992,basis = $13,000,FMV = $10,000.
B)Stock acquired in 1996,basis = $7,000,FMV = $10,000.
C)Inventory items acquired in 2004,basis = $8,000,FMV = $10,000.
D)Inventory items acquired in 2010,basis = $18,000,FMV = $10,000.
E)Juan should be indifferent between giving any of the above properties from an income tax standpoint because they each have the same fair market value.
Q2) Lilly and her husband Ben have a serious argument.In fact,Lilly moved out in August,left town,and has not been heard from since.Ben supports their two children after the split up and maintains their household.What is Ben's filing status for the current year?
A)Single.
B)Head of household.
C)Surviving spouse.
D)Married,filing separately.
Q3) Discuss why the distinction between deductions for adjusted gross income and deductions from adjusted gross income is important for individual taxpayers.
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Chapter 9: Acquisitions of Property
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Q1) The split basis rules for business property prevent the deduction of the disallowed personal loss through depreciation or a loss from the sale of business property.
A)True
B)False
Q2) Intangible property
A)Land and structures permanently attached to land.
B)Property that lacks a physical existence.
C)Property that is used by the taxpayer for purely personal purposes.
D)Any property that has form,shape,and substance.
E)Property with a physical existence that is not real estate.
F)A single property used in more than one category.
Q3) Perry inherits stock from his Aunt Margaret that had a basis of $40,000 to Margaret and a fair market value of $54,000 on May 20,2017,the date of her death.Paul sells the stock on June 21,2017 for $65,000.What is the amount and character of the gain or loss on the sale?
Q4) Adjusted basis is equal to the initial basis,plus or minus the cumulative effects of adjustments.
A)True
B)False
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Chapter 10: Cost Recovery on Property: Depreciation, depletion,
and Amortization
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Sample Questions
Q1) Which income tax concepts/constructs might taxpayers who take depletion deductions be violating?
I.Accounting method construct.
II.All-inclusive income concept.
III.Capital recovery concept.
A)Only statement I is correct.
B)Only statement II is correct.
C)Only statement III is correct.
D)Statements I and III are correct.
E)Statements I,II,and III are correct.
Q2) Nonresidential commercial realty placed in service on March 2,2017,is depreciated over
A)27.5 years,200%-declining-balance method,mid-year convention.
B)31.5 years,straight-line method,mid-month convention.
C)31.5 years,200%-declining-balance method,mid-year convention.
D)39 years,straight-line method,mid-month convention.
E)40 years,straight-line method,mid-month convention.
Q3) Discuss why listed property gets special attention.
Page 12
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Chapter 11: Property Dispositions
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Q1) Depreciation recapture provisions
I.are reclassification provisions.
II.apply to depreciable assets sold at a gain.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Dallas Wildcat Drilling Co.sells an oil-drilling rig for $3,000,000.The drilling rig was purchased in 2007 for $2,000,000.Depreciation deductions of $1,200,000 have been taken up to the time of sale.What amount and character of gain will Dallas report from the sale of this asset?
A)$2,200,000 Section 1245 ordinary income.
B)$2,200,000 long-term capital gain.
C)$1,200,000 Section 1245 ordinary income,$1,000,000 Sec 1231 gain.
D)$1,200,000 Section 1245 ordinary income,$1,000,000 long-term capital gain.
Q3) What incentive provisions or preferential treatments exist for capital gains?
Q4) Net collectibles gains are taxed at a maximum rate of 28%.
A)True
B)False
Page 13
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Chapter 12: Nonrecognition Transactions
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Sample Questions
Q1) Lindsey exchanges investment real estate parcels with Donna.Her adjusted basis in the property is $400,000,and it is encumbered by a mortgage liability of $200,000.Donna assumes the mortgage.Donna's property is appraised at $1,000,000 and is subject to a $100,000 liability.Lindsey assumes the liability.If no cash is exchanged,what is the amount of gain recognized by Lindsey?
A)$- 0 -
B)$100,000
C)$200,000
D)$500,000
E)$900,000
Q2) Which of the following can be income deferral transactions?
I.Sale of municipal bonds.
II.Involuntary conversions of property.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
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14
Chapter 13: Choice of Business Entity -- General Tax and
Nontax Factorsformation
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Q1) Monica acquires a 25% interest in Terrapin Partnership during 2012 by contributing land with a fair market value of $35,000,an adjusted basis of $18,000,and subject to a mortgage of $12,000.The partnership assumes the mortgage.What is Monica's adjusted basis in her partnership interest? Discuss how you arrived at that adjusted basis amount,and the underlying reasoning behind the rules you applied.
Q2) Discuss what limited liability means.What type of entity (or entities)offers this characteristic to its owners? What type(s)of entity (or entities)do not provide this characteristic?
Q3) A sole proprietor
I.Can be an employee of the business.
II.Has limited liability for the debts of the business.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q4) Does the selection of a corporate entity ever make sense based on a desire for lower marginal tax rates? Discuss.
Q5) Discuss the characteristics of a personal service corporation (PSC).
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Chapter 14: Choice of Business Entity -- Operations and Distributions
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Q1) Advantages of hiring one's own children to work in her/his business enterprise include which of the following?
I.The corporation can deduct wages paid to the children for work performed.
II.The corporation is required to pay Social Security taxes on the children's earnings.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Harrison Corporation sells a building for $330,000 in the current year.Harrison purchased the building in 2008 for $250,000 and had taken $20,000 in depreciation on the building up to the date of its sale.How should Harrison report the gain on the sale of the building?
A)Section 1231 gain of $100,000.
B)Ordinary income of $100,000.
C)Section 1231 gain of $80,000 and ordinary income of $20,000.
D)Section 1231 gain of $96,000 and ordinary income of $4,000.
E)Ordinary income of $96,000 and Section 1231 gain of $4,000.
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Chapter 15: Choice of Business Entity -- Other
Considerations
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Q1) A Keogh plan is a type of qualified pension for self-employed individuals.An individual or entity that establishes a Keogh plan can
I.Only establish a defined contribution profit sharing pension plan.
II.Have both employees and self-employed individuals as participants.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Sonya is an employee of Gardner Technology and will retire at the end of the current year after 8 years of service.Under Gardner's pension plan she can retire at 60% of the average of her three highest consecutive years' salary.Her average for the highest consecutive years' salary was $30,000.What is the maximum amount Sonya can receive from Gardner's pension plan?
A)$6,000
B)$14,400
C)$18,000
D)$24,000
E)$30,000
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Chapter 16: Tax Research
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Q1) During the past week,Dennis contacted his CPA to obtain advice on the most advantageous way to make a generous contribution to the accounting program at his alma mater.The CPA's work is
A)A tax planning situation.
B)A tax compliance situation.
C)A closed-fact situation.
D)A mediation situation.
E)An unknown-fact situation.
Q2) Tara does not agree with a proposed deficiency of additional tax resulting from an examination of her individual income tax return.She has not been able to satisfactorily resolve her case within the administrative processes of the Internal Revenue Service.Which of the following courts may she petition without first making payment of the contested deficiency?
A)United States Tax Court.
B)United States District Court.
C)U.S.Court of Federal Claims.
D)Any of the above.
Q3) Citators provide the full text of court decisions.
A)True
B)False
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