Federal Taxation
Final Test Solutions
Course Introduction
Federal Taxation explores the fundamental principles and applications of United States federal income tax law as it pertains to individuals, businesses, and other entities. The course covers topics such as income determination, deductions, credits, property transactions, and the tax treatment of various forms of business organizations, including sole proprietorships, partnerships, corporations, and S corporations. Students will gain an understanding of tax compliance, planning strategies, and the ethical considerations involved in preparing and filing federal tax returns. Emphasis is placed on the interpretation of the Internal Revenue Code, Treasury regulations, and relevant case law, preparing students for real-world tax practice and further study in taxation.
Recommended Textbook
Prentice Halls Federal Taxation 2014 Individuals 27th Edition by Timothy J. Rupert
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Page 2
Chapter 1: An Introduction to Taxation
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Sample Questions
Q1) Describe the components of tax practice.
Answer: a.Tax compliance and procedure.
b.Tax research.
c.Tax planning and consulting.
d.Financial planning.
Q2) The IRS must pay interest on
A)all tax refunds.
B)tax refunds paid later than 30 days after the due date.
C)tax refunds paid later than 45 days after the due date.
D)The IRS never pays interest on tax refunds.
Answer: C
Q3) The unified transfer tax system
A)imposes a single tax upon transfers of property during an individual's lifetime only.
B)imposes a single tax upon transfers of property during an individual's life and at death.
C)imposes a single tax upon transfers of property only at an individual's death.
D)none of above.
Answer: B
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Chapter 2: Determination of Tax
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Sample Questions
Q1) Deborah,who is single,is claimed as a dependent on her parents' tax return.She had a part-time job during 2013 and earned $850 during the year,which was her only income.What is her standard deduction?
A)$850
B)$1,000
C)$1,200
D)$6,100
Answer: C
Q2) Edward,a widower whose wife died in 2010,maintains a household for himself and his daughter who qualifies as his dependent.Edward's most favorable filing status for 2013 is A)single.
B)surviving spouse.
C)head of household.
D)married filing jointly.
Answer: C
Q3) Nonresident aliens are allowed a full standard deduction.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Gross Income: Inclusions
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Sample Questions
Q1) Homer Corporation's office building was destroyed by fire.Homer collected insurance of $250,000,which equaled the building's basis,and $150,000 for profits lost during the time the company was rebuilding the office building.What is the amount taxable this year?
A)$0
B)$150,000
C)$250,000
D)$400,000
Answer: B
Q2) A taxpayer may not avoid responsibility for payment of income taxes by assigning the income to a third party.
A)True
B)False
Answer: True
Q3) The cash receipts and disbursements method of accounting is used by most individual taxpayers and most noncorporate businesses that do not have inventories.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Gross Income: Exclusions
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Sample Questions
Q1) Accelerated death benefits received by a terminally ill person may be excluded from taxable income.
A)True
B)False
Q2) A nursing home maintains a cafeteria that is used by employees,patients,and visitors.The value of free meals provided to employees while on duty so that they may be available for emergency calls is not taxable.
A)True
B)False
Q3) Fatima's employer funds childcare for all employees' children.She pays nothing for this service.The cost of Fatima's child care is $7,200 a year.How much of the child care benefits are taxable to Fatima?
A)$0
B)$2,200
C)$5,000
D)$7,200
Q4) Punitive damages are taxable unless they are awarded for physical injuries.
A)True
B)False
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Chapter 5: Property Transactions: Capital Gains and Losses
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Sample Questions
Q1) Expenditures which do not add to the value or prolong the life of property may be expensed in the year in which they are incurred.
A)True
B)False
Q2) Normally,a security dealer reports ordinary income on the sale of securities unless it is specifically identified as a security being held for investment.
A)True
B)False
Q3) David gave property with a basis of $1,330 to Hannah when the property had a FMV of $1,000 and paid gift taxes of $80.If Hannah later sells the property for $1,400,Hannah's basis (to determine gain)in the property immediately before the sale is
A)$1,000.
B)$1,080.
C)$1,330.
D)$1,410.
Q4) Gain on sale of a patent by an inventor generally is ordinary income.
A)True
B)False
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Chapter 6: Deductions and Losses
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Q1) If an activity produces a profit for at least two years during a consecutive five-year period,the burden of proof shifts to the IRS to show that the activity is not profit-motivated.
A)True
B)False
Q2) Capital expenditures add to the value,substantially prolong the useful life,or restore the life property.
A)True
B)False
Q3) Explain the rules for determining whether a home is considered a rental property or a vacation home and the tax consequences of this classification.
Q4) Losses on the sale of property between a taxpayer and his/her more than 50-percent-owned corporation are disallowed.
A)True
B)False
Q5) Taxpayers may deduct legal fees incurred in the acquisition of property.
A)True
B)False
Q6) Discuss when expenses are deductible under the accrual method of accounting.
Page 8
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Chapter 7: Itemized Deductions
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Sample Questions
Q1) On December 1,2012,Delilah borrows $2,000 from her credit union to use in her business.Under the terms of the contract,Delilah actually receives $1,940 but is required to repay $2,000 in three months.
a.What amount may Delilah deduct as interest expense in 2012 and in 2013 if she is a cash basis taxpayer?
b.What amount may Delilah deduct as interest expense in 2012 and in 2013 if she is an accrual basis taxpayer?
Q2) During the current year,Jane spends approximately 90 hours of her time in developing computer software for a church.As a programmer and data analyst,Jane normally bills her clients at $130 per hour for her time.Jane also drives her car a total of 800 miles in performing her voluntary work.Jane's deductible contribution is
A)$0.
B)$112.
C)$11,700.
D)$11,812.
Q3) Explain under what circumstances meals and lodging en route to a medical facility may be deductible.
Q4) Discuss the timing of the allowable medical expense deduction.
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Page 9
Chapter 8: Losses and Bad Debts
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Sample Questions
Q1) Charlie owns activity B which was considered a passive activity and generated a $17,000 suspended loss.Charlie increases his involvement with activity B so that this year activity B is not considered passive for Charlie.During this year,activity B produces a $9,000 loss.In addition,Charlie acquires an investment in activity X,a passive activity,this year.Charlie's share of activity X's income is $13,000.Charlie's salary this year is $70,000.As a result,this year Charlie must
A)offset B's loss carryover against X's current income and carry over $9,000 loss from activity B to next year.
B)offset B's carryover loss and current loss against X's income first and then offset any remaining loss against salary.
C)offset B's $9,000 loss against X's $13,000 income and offset B's loss carryover against the remaining $4,000 of X's income.
D)offset B's current $9,000 loss against his salary and offset B's loss carryover against X's income and carry over $4,000 of loss to next year.
Q2) What must an individual taxpayer prove to receive a worthless security deduction?
Q3) What are some factors which indicate that a debt may be worthless?
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Chapter 9: Employee Expenses and Deferred Compensation
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Q1) If an individual is self-employed,business-related expenses are deductions for AGI.
A)True
B)False
Q2) Ross works for Houston Corporation,which has a contributory defined contribution pension plan.The employer's monthly contribution to the plan is 8 percent of each participating employee's monthly salary,while the employee contributes only 6 percent.Ross's monthly salary is $3,000.Which of the following statements best describes the benefits of the plan?
A)Houston receives a deduction for its contributions to the plan when Ross receives a distribution from the plan.
B)While Ross is taxed on the employer's contributions to the plan,his own contributions are not taxed until he receives a distribution from the plan.
C)Ross may deduct his own contributions to the pension plan,and Ross reports income from the plan each year until he receives distributions from the plan.
D)The earnings on amounts contributed to the plan are not taxed to Ross until he retires or receives a distribution from the plan.
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Chapter 10: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) Most taxpayers elect to expense R&E expenditures because of the immediate tax benefit.
A)True
B)False
Q2) MACRS depreciation on an SUV weighing over 6,000 pounds is limited to $3,160 for the first year placed in service.
A)True
B)False
Q3) The straight-line method may be elected for depreciating tangible personal property placed in service after 1986.
A)True
B)False
Q4) On June 30,2013,Temika purchased office furniture costing $259,000 and computers with a cost of $400,000.She uses Sec.179.Her business income is $900,000 without considering Sec.179.How should she allocate the 179 election in order to maximize her total cost recovery deductions (depreciation and Sec.179)for 2013 (assume that bonus depreciation is not available)?
Q5) Why would a taxpayer elect to use the alternative depreciation system rather than the MACRS rules?
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Chapter 11: Accounting Periods and Methods
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Sample Questions
Q1) Bergeron is a local manufacturer of off-shore drilling platforms.This year,Bergeron entered into a contract to construct a drilling platform,which will be placed in the North Atlantic Ocean.The total contract price is $5,000,000,and Bergeron estimates the total construction cost at $2,000,000.Actual costs incurred this year are $600,000.If Bergeron uses the completed contract method,the gross profit for this year is
A)$0.
B)$400,000.
C)$600,000.
D)$2,000,000.
Q2) In 2013 Anika Co.adopted the simplified dollar-value LIFO method.Inventory under FIFO in 2012 and 2013 is $400,000 and $600,000,respectively.The Consumer Price Index for 2012 is 115 and the Consumer Price Index in 2013 is 125 percent.How much is Anika's inventory at the end of year 2013 under simplified LIFO?
Q3) Under the cash method of accounting,all expenses are deductible when paid.
A)True
B)False
Q4) Discuss the purpose of the imputed interest rules.
Q5) What is the significance of the Thor Power Tool Co.case?
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Chapter 12: Property Transactions: Nontaxable Exchanges
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Sample Questions
Q1) Discuss the basis rules of property received in a nontaxable like-kind exchange.
Q2) The exchange of a partnership interest for an interest in another partnership qualifies as a like-kind exchange.
A)True
B)False
Q3) Whitney exchanges timberland held as an investment for undeveloped land with a $300,000 FMV.Whitney's basis for the timberland is $150,000.Her tractor with a $15,000 basis and a $10,000 FMV is also transferred as part of the exchange.
a.What is the amount,if any,of gain or loss recognized on the transaction?
b.What is the basis of the undeveloped land?
Q4) Theresa owns a yacht that is held for personal use and has a $100,000 basis.The yacht is destroyed by a storm and Theresa collects $120,000 from the insurance company.She purchases a new $150,000 yacht for personal use and elects to defer any gain on the transaction.What is the basis of the new yacht?
Q5) Replacing a building with land qualifies as replacement property under the involuntary conversion rules relevant to a casualty.
A)True B)False
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Chapter 13: Property Transactions: Section 1231 and Recapture
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Sample Questions
Q1) If no gain is recognized in a nontaxable like-kind exchange involving Sec.1245 or Sec.1250 property,the recapture potential carries over to the replacement property.
A)True
B)False
Q2) Sec.1231 property must satisfy a holding period of more than one year.
A)True
B)False
Q3) During the current year,George recognizes a $30,000 Section 1231 gain on sale of land and a $18,000 Section 1231 loss on the sale of land.Prior to this,George's only Section 1231 item was a $14,000 loss six years ago.George must report a
A)$12,000 net LTCG.
B)$12,000 ordinary income.
C)$14,000 ordinary income.
D)$10,000 ordinary income and $2,000 net LTCG.
Q4) WAM Corporation sold a warehouse during the current year for $830,000.The building had been acquired in 1989 at a cost of $730,000 and had total straight-line depreciation of $510,000. What is the amount and nature of the gain or loss on the sale of the warehouse?
Page 15
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Chapter 14: Special Tax Computation Methods, tax Credits, and Payment of Tax
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Sample Questions
Q1) Brad and Shelly's daughter is starting her freshman year of college.Brad and Shelly will be able to claim the American Opportunity Tax Credit for a percentage of the cost of tuition and room and board.
A)True
B)False
Q2) The general business credit is a refundable credit.
A)True
B)False
Q3) Marguerite and Josephus have two children,ages 13 and 10.Their modified AGI is $120,500.What is their child tax credit?
A)$900
B)$1,000
C)$2,000
D)None of the above.
Q4) Which one of the following is a refundable credit?
A)earned income credit
B)child and dependent care credit
C)lifetime learning credit
D)credit for the elderly and disabled
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Chapter 15: Tax Research
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Sample Questions
Q1) Regulations issued prior to the latest tax legislation dealing with a specific Code section are still effective to the extent they do not conflict with the provisions in the new legislation.
A)True
B)False
Q2) Compare and contrast "interpretative" and "statutory" regulations.
Q3) Which tax service is usually deemed to be the most authoritative?
A)United States Tax Reporter
B)Standard Federal Tax Reporter
C)Federal Tax Coordinator 2d
D)All are equally authoritative.
Q4) George's case was handled under the "small tax case procedure." He does not agree with the findings of the Tax Court.He would like to appeal the decision.Which one of the following is true?
A)There is no appeal.
B)He can appeal the case,but only if the amount of tax involved is greater than $5,000.
C)He would appeal first to the U.S.Court of Appeals for the Federal Circuit.
D)He would appeal first to the U.S.Court of Federal Claims.
Q5) Describe the format of a client memo.
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Chapter 16: Corporations
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Q1) Charades Corporation is a publicly held company listed on the New York Stock Exchange.During the current year,its chief executive officer,Samantha Chen,receives the following compensation from the corporation: salary,$1,500,000; commissions based on sales generated by Samantha $200,000; payments to a qualified pension plan,$30,000; and tax-free fringe benefits,$20,000.What is the total amount that Charades may deduct?
A)$1,000,000
B)$1,250,000
C)$1,500,000
D)$1,750,000
Q2) Certain personal service corporations are subject to a 35% flat rate of tax. A)True
B)False
Q3) Corporations that are members of a brother-sister affiliated group may file a consolidated return if the proper election is made.
A)True
B)False
Q4) What factors are considered in determining whether a redemption will be treated as an exchange subject to capital gain or loss treatment?
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Chapter 17: Partnerships and S Corporations
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Q1) What is the primary purpose of Form 1065,Partnership Tax Return?
Q2) Clark and Lois formed an equal partnership three years ago.Clark contributed cash of $160,000 while Lois contributed land with a $90,000 adjusted basis and a $160,000 FMV.Three years later the land is sold for $210,000.The tax results to Clark and Lois are
A)$25,000 of gain to both Clark and Lois.
B)$50,000 of gain to both Clark and Lois.
C)$25,000 of gain to Clark and $70,000 gain to Lois.
D)$25,000 of gain to Clark and $95,000 gain to Lois.
Q3) The basis of a partnership interest is equal to the sum of money contributed plus the FMV of the property transferred to the partnership.
A)True
B)False
Q4) Although a partner's distributive share of income,deductions,losses,and credits is generally determined by partnership agreement,special allocation provisions restrict the partners' freedom to shift some tax benefits among partners.
A)True
B)False
Q5) Discuss the concept of partnership guaranteed payments.
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Chapter 18: Taxes and Investment Planning
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Sample Questions
Q1) Which of the following is a classic example of the Deferred Model?
A)a deductible traditional IRA
B)a 401(k)plan
C)a H.R.10 (Keogh)plan
D)a nondeductible traditional IRA
Q2) If a fully-taxable bond yields a BTROR of 8% (R<sub>b</sub> = 8%)and a tax-exempt bond of similar risk earns a BTROR of 5% (R<sub>f</sub> = 5%),then the implicit tax is A)3%.
B)5%.
C)8%.
D)None of the above.
Q3) Which of the following concerning implicit taxes and clienteles is not true?
A)Market forces drive down the BTROR of tax-favored assets.
B)The reduced return of tax-favored assets is an implicit tax.
C)Investors whose tax rate exceeds that of the marginal investor can reap some benefit through the clientele effect.
D)Marginal investors will always benefit from the implicit tax on tax-favored investments.
Q4) Discuss the decision rules for current salary versus deferred compensation.
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