Federal Taxation
Final Exam Questions
Course Introduction
Federal Taxation is an in-depth study of the principles and regulations governing the federal income tax system in the United States. The course introduces students to the conceptual framework of taxation, emphasizing the determination of taxable income, allowable deductions, tax credits, and the application of tax rates for individuals, partnerships, and corporations. Topics include filing requirements, tax planning strategies, compliance issues, and the ethical responsibilities of taxpayers and tax professionals. Through analysis of current tax laws and case studies, students develop practical skills for computing tax liabilities and preparing federal tax returns, as well as an understanding of the broader social and economic implications of tax policy.
Recommended Textbook
South Western Federal Taxation 2013 Individual Income Taxes 36th Edition by William H
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) Unlike the Federal counterpart,the amount of the state excise taxes on gasoline varies from state to state.
A)True
B)False
Answer: True
Q2) The value added tax (VAT)has had wide acceptance in the international community.
A)True
B)False
Answer: True
Q3) If fraud is involved,there is no time limit on the assessment of a deficiency by the IRS.
A)True
B)False
Answer: True
Q4) Some states use their state income tax return as a means of collecting unpaid sales and use taxes.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Working With the Tax Law
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Q1) What is the role of the Joint Conference Committee in the legislative process?
Answer: When the Senate version of a bill differs from that passed by the House,the Joint Conference Committee,which includes members of both the House Ways and Means Committee and the Senate Finance Committee,is called upon to resolve the differences.The deliberations of the Joint Conference Committee usually produce a compromise between the two versions,which is then voted on by both the House and the Senate.If both bodies accept the bill,it is referred to the President for approval or veto.
Q2) Which is presently not a major tax service?
A) Standard Federal Tax Reporter.
B) Federal Taxes.
C) United States Tax Reporter.
D) Tax Management Portfolios.
E) All of the above are major tax services.
Answer: B
Q3) Three judges will normally hear each U.S.Tax Court case.
A)True
B)False
Answer: False
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4
Chapter 3: Tax Formula and Tax Determination: an
Overview of Property Transactions
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Q1) When the kiddie tax applies,the child need not file an income tax return because the child's income will be reported on the parents' return.
A)True
B)False
Answer: False
Q2) The filing status of a taxpayer (e.g.,single,head of household)must be identified before taxable income is determined.
A)True
B)False
Answer: True
Q3) Maude's parents live in another state and she cannot claim them as her dependents.If Maude pays their medical expenses,can she derive any tax benefit from doing so? Explain.
Answer: If Maude could otherwise claim her parents as dependents except for not satisfying either the gross income or the joint return tests,she can claim any medical expenses paid on their behalf.
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Detroit Corporation sued Chicago Corporation for intentional damage to Detroit's goodwill.Detroit had created its goodwill through providing high-quality services to its customers.Thus,no basis for the goodwill appeared on Detroit's balance sheet.The suit was settled and Detroit received $1,500,000 for the damages to its goodwill.
A) The $1,500,000 is not taxable because it represents a recovery of capital.
B) The $1,500,000 is taxable because Detroit has no basis in the goodwill.
C) The $1,500,000 is not taxable because Detroit did nothing to earn the money.
D) The $1,500,000 is not taxable because Detroit settled the case.
E) None of the above.
Q2) The taxable portion of Social Security benefits is dependent upon:
A) How much the taxpayer has contributed to the Social Security program.
B) The individual's age.
C) The number of quarters the individual worked.
D) The individual's adjusted gross income from other sources.
E) None of the above.
Q3) Barney painted his house which saved him $3,000.According to the realization requirement,Barney must recognize $3,000 of income.
A)True
B)False
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Chapter 5: Gross Income: Exclusions
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Q1) The CEO of Cirtronics Inc.,discovered that the company's competitor had adopted a cafeteria plan for its employees.The CEO is concerned about retaining his talented employees and would like you to provide a brief explanation as to why a cafeteria plan may be attractive to the company's employees.
Q2) Christie sued her former employer for a back injury she suffered on the job in 2011.As a result of the injury,she was partially disabled.In 2012,she received $240,000 for her loss of future income,$160,000 in punitive damages because of the employer's flagrant disregard for the employee's safety,and $15,000 for medical expenses.The medical expenses were deducted on her 2011 return,reducing her taxable income by $12,000.Christie's 2012 gross income from the above is:
A) $415,000.
B) $412,000.
C) $255,000.
D) $175,000.
E) $172,000.
Q3) 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.)
Q4) What Federal income tax benefits are provided for college students?
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Chapter 6: Deductions and Losses: in General
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Q1) If a taxpayer cannot satisfy the three-out-of-five year presumption test associated with hobby losses,then expenses from the activity cannot be deducted in excess of the gross income from the activity.
A)True
B)False
Q2) Which of the following is correct?
A) A personal casualty loss is classified as a deduction from AGI.
B) Real estate taxes on a taxpayer's personal residence are classified as deductions from AGI.
C) An expense associated with rental property is classified as a deduction from AGI.
D) Only a. and b. are correct. E) a., b., and c., are correct.
Q3) Taylor,a cash basis architect,rents the building in which his office is located for $5,000 per month.He commenced his practice on February 1,2012.In order to guarantee no rent increases during an 18-month period,he signed an 18-month lease and prepaid the $90,000 on February 1,2012.How much can Taylor deduct as rent expense for 2012?
Q4) Brenda invested in the following stocks and bonds during 2012.
Q5) Briefly discuss the disallowance of deductions for capital expenditures.
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) Peggy is in the business of factoring accounts receivable.Last year,she purchased a $30,000 account receivable for $25,000.This year,the account was settled for $25,000.How much loss can Peggy deduct and in which year?
A) $5,000 for the current year.
B) $5,000 for the prior year and $5,000 for the current year.
C) $5,000 for the prior year.
D) $10,000 for the current year.
E) None of the above.
Q2) Jed is an electrician.Jed and his wife are accrual basis taxpayers and file a joint return.Jed wired a new house for Alison and billed her $15,000.Alison paid Jed $10,000 and refused to pay the remainder of the bill,claiming the fee to be exorbitant.Jed took Alison to Small Claims Court for the unpaid amount and was awarded a $2,000 judgement.Jed was never able to collect the judgement nor the remainder of the bill from Alison.What amount of loss may Jed deduct in the current year?
A) $0.
B) $2,000.
C) $3,000.
D) $5,000.
E) None of the above.
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) Alice purchased office furniture on September 20,2012,for $100,000.On October 10,she purchased business computers for $80,000.Alice did not elect to expense any of the assets under § 179,nor did she elect straight-line cost recovery.She did not take additional first-year depreciation.Determine the cost recovery deduction for the business assets for 2012.
A) $6,426.
B) $14,710.
C) $25,722.
D) $30,290.
E) None of the above.
Q2) Howard's business is raising and harvesting peaches.On March 10,2012,Howard purchased 10,000 new peach trees at a cost of $60,000.Howard does not elect to expense assets under § 179.If eligible,Howard takes additional first-year depreciation.Determine the cost recovery deduction for 2012.
A) $0.
B) $3,000.
C) $31,500.
D) $60,000.
E) None of the above.
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) After graduating from college with a degree in chemistry,Alberto obtains a job as a chemist with DuPont.Alberto's job search expenses qualify as deductions.
A)True
B)False
Q2) Amy lives and works in St.Louis.In the morning she flies to Boston,has a three-hour business meeting,and returns to St.Louis that evening.For tax purposes,Amy was away from home.
A)True
B)False
Q3) For self-employed taxpayers,travel expenses are not subject to the 2%-of-AGI floor.
A)True
B)False
Q4) At age 65,Camilla retires from her job in Boston and moves to Florida.As a retiree,she is not subject to the time test in deducting her moving expenses.
A)True
B)False
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) Leona borrows $100,000 from First National Bank and uses the proceeds to purchase City of Houston bonds.The interest Leona pays on this loan is deductible as investment interest subject to the investment interest limits.
A)True
B)False
Q2) Fees for automobile inspections,automobile titles and registration,bridge and highway tolls,parking meter deposits,and postage are not deductible if incurred for personal reasons,but they are deductible as deductions for AGI if incurred as a business expense by a self-employed taxpayer.
A)True
B)False
Q3) Herbert is the sole proprietor of a furniture store.He can deduct real property taxes on his store building but he cannot deduct state income taxes related to his net income from the furniture store as a business deduction.
A)True
B)False
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Chapter 11: Investor Losses
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Q1) Stan,a computer lab manager,earns a salary of $80,000 and receives $25,000 in dividends and interest during the year.In addition,he incurs a loss of $40,000 from an investment in a non-real estate passive activity.His at-risk amount in the activity at the beginning of the year is $55,000.What is Stan's adjusted gross income for this year?
A) $65,000.
B) $70,000.
C) $105,000.
D) None of the above.
Q2) Individuals can deduct from active or portfolio income losses of up to $25,000 from real estate rental activities in which they actively participate.
A)True
B)False
Q3) Identify how the passive loss rules broadly classify various types of income and losses.Provide examples of each category.
Q4) Anne sells a rental house for $100,000 (adjusted basis of $55,000).During her ownership,$60,000 of losses have been suspended under the passive activity loss rules.Determine the tax treatment to Anne on the disposition of the property.
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Chapter 12: Alternative Minimum Tax
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Q1) Which of the following statements is incorrect?
A) If the tentative minimum tax exceeds the regular income tax liability, the AMT is $0.
B) The exemption amount increases as AMTI increases.
C) The AMT tax rate for an individual taxpayer can be as high as 26%.
D) Only a. and b. are incorrect.
E) a., b., and c. are incorrect.
Q2) Keosha acquires 10-year personal property to use in her business in 2012 and takes the maximum cost recovery deduction for regular income tax purposes.As a result of this,Keosha will have a positive AMT adjustment in 2012.
A)True
B)False
Q3) The C corporation AMT rate can be higher than the individual AMT rates.
A)True
B)False
Q4) If a gambling loss itemized deduction is permitted for regular income tax purposes,there will be no AMT adjustment associated with the gambling loss.
A)True
B)False
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Chapter 13: Tax Credits and Payment Procedures
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Q1) Qualifying tuition expenses paid from the proceeds of a tax-exempt scholarship do not give rise to an education tax credit.
A)True
B)False
Q2) Jermaine and Kesha are married,file a joint tax return,have AGI of $82,500,and have two children.Devona is beginning her freshman year at State University during Fall 2012,and Arethia is beginning her senior year at Northeast University during Fall 2012 after having completed her junior year during the spring of that year.Both Devona and Arethia are claimed as dependents on their parents' tax return.Devona's qualifying tuition expenses and fees total $4,000 for the fall semester,while Arethia's qualifying tuition expenses and fees total $6,200 for each semester during 2012.Full payment is made for the tuition and related expenses for both children during each semester.The American Opportunity credit available to Jermaine and Kesha for 2012 is:
A) $2,500.
B) $3,000.
C) $5,000.
D) $6,000.
E) None of the above.
Q3) Discuss the treatment of unused general business credits.
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Q1) Monica sells a parcel of land to her son,Elbert,for $90,000.Monica's adjusted basis is $100,000.Three years later,Elbert gives the land to his fiancée,Karen.At that date,the land is worth $104,000.No gift tax is paid.Since Elbert is going to be stationed in the U.S.Army in Germany for 3 years,they do not plan on being married until his tour is completed.Six months after receiving the land,Karen sells it for $110,000.At the same time,Karen sends Elbert a "Dear John" email.Calculate Karen's realized and recognized gain or loss.
Q2) For a corporate distribution of cash or other property to a shareholder,when does dividend income or a return of capital result?
Q3) Broker's commissions,legal fees,and points paid by the seller reduce the seller's amount realized.
A)True
B)False
Q4) The holding period of nontaxable stock rights includes the holding period of the stock on which the rights were distributed.
A)True
B)False
Q5) What is a deathbed gift and what tax consequences apply?
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) To qualify as a like-kind exchange,real property must be exchanged either for other real property or for personal property with a statutory life of at least 39 years.
A)True
B)False
Q2) Livestock of different sexes can qualify for like-kind exchange treatment if the livestock has been held for over one year.
A)True
B)False
Q3) A taxpayer who sells his or her principal residence at a realized loss can elect to recognize the loss even if a qualified residence is acquired during the statutory time period.
A)True
B)False
Q4) Under the taxpayer-use test for a § 1033 involuntary conversion,the taxpayer has less flexibility in qualifying replacement property than under the functional-use test.
A)True
B)False
Q5) Define qualified small business stock under § 1045.
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) An individual taxpayer with 2012 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2013.
A)True
B)False
Q2) The tax law requires that capital gains and losses be separated from other types of gains and losses because an alternative tax calculation may be used when taxable income includes net long-term capital gain.
A)True
B)False
Q3) Laura purchased for $1,610 a $2,000 bond when it was issued two years ago.Laura amortized $200 of the original issue discount and then sold the bond for $1,800.Which of the following statements is correct?
A) Laura has $10 of long-term capital loss.
B) Laura has $190 of long-term capital gain.
C) Laura has no capital gain or loss.
D) Laura has $190 of long-term capital loss.
E) None of the above.
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Chapter
17: Property Transactions: Section 1231 and Recapture Provisions
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Q1) Vertical,Inc.,has a 2012 net § 1231 gain of $67,000 and had a $22,000 net § 1231 loss in 2011.For 2012,Vertical's net § 1231 gain is treated as:
A) $45,000 long-term capital gain and $22,000 ordinary loss.
B) $67,000 ordinary gain.
C) $45,000 long-term capital gain and $22,000 ordinary gain.
D) $67,000 capital gain.
E) None of the above.
Q2) Charmine,a single taxpayer with no dependents,has already incurred a $10,000 § 1231 gain in 2012 and has no § 1231 lookback losses.The taxpayer purchased a business machine for $100,000 five years ago,$70,000 of depreciation has been taken on it,and the machine is now worth $90,000.How will the net § 1231 gain or loss be affected if the taxpayer trades in the business machine for a like-kind business machine and pays an additional $12,000 in cash to obtain the replacement machine? If Charmine already has $322,000 of taxable income which does not include a $10,000 §1231 gain or any capital gains or losses,what is her taxable income?
Q3) A race horse must be held more than 18 months to qualify as a § 1231 asset.
A)True
B)False
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Chapter 18: Accounting Periods and Methods
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Q1) Hal sold land held as an investment with a fair market value of $100,000 for $36,000 cash and a note for $64,000 that was due in two years.The note bore interest of 11% when the applicable Federal rate was 7%.Hal's cost of the land was $40,000.Because of the buyer's good credit record and the high interest rate on the note,Hal thought the fair market value of the note was at least $74,000.
A) Hal can elect to treat the $36,000 as a recovery of capital.
B) Hal must recognize $60,000 gain in the year of sale.
C) Hal must recognize $36,000 gain in the year of sale.
D) Unless Hal elects not to use the installment method, Hal must recognize $21,600 gain in the year of sale.
E) None of the above.
Q2) In 2012,T Corporation changed its tax year from ending each September 30th to ending each December 31st.The corporation earned $25,000 during the period October 1,2012 through December 31,2012.The tax on the annualized income for the short period will be greater than the tax on $25,000 when the tax rates are progressive.
A)True
B)False
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Chapter 19: Deferred Compensation
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Q1) From an employee's point of view,discuss the difference between the tax treatment accorded to a nonqualified stock option (NQSO)that has an ascertainable fair market value and one that does not.
Q2) Dianna participates in a defined benefit plan that uses a fixed formula providing an employee with a benefit of 2% for each year of service,up to a maximum of 30 years.The total percentage accumulated before retirement is applied to the average of her three highest years of salary.Dianna works for 21 years,and the average of her three highest years of salary is $290,000.Calculate the amount of retirement benefits she will receive each year.
A) $0.
B) $102,800.
C) $110,000.
D) $250,000.
E) None of the above.
Q3) Low- and middle-income taxpayers may make nondeductible contributions up to $4,000 per child per year to a Coverdell Education Savings Account (CESA).
A)True
B)False
Q4) A qualified pension and profit sharing plan must satisfy which requirements?
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Chapter 20: Corporations and Partnerships
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Questions
Q1) In order to voluntarily revoke an S election,all of the shareholders must consent to the revocation.
A)True
B)False
Q2) In determining which organizational expenditures can be amortized,it is the year incurred (and not paid)that controls if the corporation uses the cash method of accounting.
A)True
B)False
Q3) Four unrelated,calendar year corporations are formed on January 1,2012,and have the following qualified organizational expenditures: $4,000 for Maize Corporation; $15,000 for Orange Corporation; $53,000 for Pearl Corporation; and $56,000 for Chestnut Corporation.What is the maximum deduction each can claim for 2012?
Q4) Under the check-the-box Regulations,a multi-owner entity that defaults (i.e.,makes no election)will be taxed as a partnership.
A)True
B)False
Q5) What causes a partner's basis in a partnership interest to fluctuate?
Q6) Why were the check-the-box Regulations issued?
Page 22
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