Federal Taxation
Final Test Solutions
Course Introduction
Federal Taxation provides an in-depth examination of the U.S. federal tax system as it pertains to individuals, businesses, and other entities. The course covers the structure and administration of the Internal Revenue Code, fundamental concepts in gross income, deductions, credits, and tax liabilities. Students will learn about the tax implications of various types of income, property transactions, and business operations, with an emphasis on compliance, planning, and ethical considerations. Through case studies and practical exercises, the course prepares students to apply tax rules to real-world scenarios and understand their impact on financial decision-making.
Recommended Textbook
South Western Federal Taxation 2013 Individual Income Taxes 36th Edition by William H
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2435 Verified Questions
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Sample Questions
Q1) A fixture will be subject to the ad valorem tax on realty rather than the ad valorem tax on personalty.
A)True
B)False
Answer: True
Q2) The U.S.(either Federal,state,or local)does not impose:
A) Franchise taxes.
B) Severance taxes.
C) Occupational fees.
D) Export duties.
E) Customs duties.
Answer: D
Q3) States impose either a state income tax or a general sales tax,but not both types of taxes.
A)True
B)False
Answer: False
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Page 3
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) Temporary Regulations are only published in the Internal Revenue Bulletin.
A)True
B)False Answer: False
Q3) The research process should begin with a tax service.
A)True
B)False Answer: False
Q4) The IRS is required to make a letter ruling public.
A)True
B)False Answer: True
Q5) Determination letters usually involve proposed transactions.
A)True
B)False Answer: False
Page 4
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Chapter 3: Tax Formula and Tax Determination: an
Overview of Property Transactions
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Sample Questions
Q1) Dan and Donna are husband and wife and file separate returns for the year.If Dan itemizes his deductions from AGI,Donna still can claim the standard deduction.
A)True
B)False
Answer: False
Q2) Emily,whose husband died in December 2011,maintains a household in which her dependent daughter lives.Which (if any)of the following is her filing status for the tax year 2012? (Note: Emily is the executor of her husband's estate.)
A) Single.
B) Married, filing separately.
C) Surviving spouse.
D) Head of household.
E) Married, filing jointly.
Answer: C
Q3) Currently,the top income tax rate in effect is not the highest it has ever been.
A)True
B)False
Answer: True
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Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) Ted loaned money to a business acquaintance.The loan was for $100,000 and was to be repaid at the rate of $13,000 each year for ten years.The effective interest rate was 5%.He also purchased an annuity contract for $100,000 that would pay him $13,000 each year for ten years.Will Ted's gross income for the first year differ with the loan as compared to the annuity contract? Explain your answer.
Q2) Ted earned $150,000 during the current year.He paid Alice,his former wife,$75,000 in alimony.Under these facts,the tax is paid by the person who benefits from the income rather than the person who earned the income.
A)True
B)False
Q3) In some community property states,the income from property that was inherited by a spouse after the marriage is treated as all earned by the spouse who inherited the property.
A)True
B)False
Q4) Melissa is a compulsive coupon clipper.She often brags about the time she purchased a cart full of groceries for $5.00,when the cost without coupons would have been $50.Discuss whether Melissa realizes gross income from her coupon clipping.
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Page 6
Chapter 5: Gross Income: Exclusions
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Sample Questions
Q1) Olaf was injured in an automobile accident and received $25,000 for his physical injury,$10,000 for his loss of income,and $50,000 punitive damages.As a result of the award,the amount Olaf must include in gross income is:
A) $10,000.
B) $50,000.
C) $60,000.
D) $85,000.
E) None of the above.
Q2) Brooke works part-time as a waitress in a restaurant.For groups of 7 or more customers,the customer is charged 15% of the bill for Brooke's services.For parties of less than 7,the tips are voluntary.Brooke received $11,000 from the groups of 7 or more and $7,000 in voluntary tips from all other customers.Using the customary 15% rate,her voluntary tips would have been only $6,000.Brooke must include $18,000 ($11,000 + $7,000)in gross income.
A)True
B)False
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.)
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Chapter 6: Deductions and Losses: in General
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Sample Questions
Q1) Amos,a shareholder-employee of Pigeon,Inc.,receives a $400,000 salary.The IRS classifies $125,000 of this amount as unreasonable compensation.The effect of this reclassification is to decrease Amos' gross income by $125,000 and increase Pigeon's gross income by $125,000.
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 are deductions for AGI?
A) Mortgage interest on a personal residence.
B) Property taxes on a personal residence.
C) Mortgage interest on a building used in a business.
D) Fines and penalties incurred in a trade or business.
E) None of the above.
Q4) In distinguishing whether an activity is a hobby or a trade or business,discuss the presumptive rule.
Q5) Are there any circumstances under which lobbying expenditures are deductible?
Page 8
Q6) Under what circumstance can a bribe be deducted?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) When a net operating loss is carried back to a non-loss year,the net operating loss will affect the charitable contribution deduction of the carryback year.
A)True
B)False
Q2) Discuss the treatment,including the carryback and carryforward periods,of casualty losses incurred with personal use property.
Q3) Alma is in the business of dairy farming.During the year,one of her barns was completely destroyed by fire.The adjusted basis of the barn was $90,000.The fair market value of the barn before the fire was $75,000.The barn was insured for 95% of its fair market value,and Alma recovered this amount under the insurance policy.Alma has adjusted gross income for the year of $40,000 (before considering the casualty).Determine the amount of loss she can deduct on her tax return for the current year.
A) $3,750.
B) $14,650.
C) $14,750.
D) $18,750.
E) None of the above.
Q4) How is qualified production activities income (QPAI)calculated?
Page 9
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) The basis of an asset on which $139,000 has been expensed under § 179 will be reduced by $139,000,even if $139,000 cannot be expensed in the current year because of the taxable income limitation.
A)True
B)False
Q2) On February 20,2012,Susan paid $200,000 for a qualified leasehold improvement to an office building that she is going to lease to John.The lease will begin on June 1,2012,and terminate on May 31,2022.At the termination of the lease,the improvement will be worthless.Susan did not elect to treat the leasehold improvement property as § 179 property.She does not take additional first-year depreciation.Determine Susan's deductible loss as a result of the termination of the lease.
A) $0.
B) $123,503.
C) $127,990.
D) $128,631.
E) None of the above.
Q3) All listed property is subject to the substantiation requirements of § 274.
A)True
B)False
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) Dove Corporation pays for a trip to Jamaica for its two top salespersons.This expense is not subject to the cutback adjustment.
A)True
B)False
Q2) Alexis (a CPA and JD)sold her public accounting practice in Des Moines and accepted a job with the Seattle office of a national accounting firm.Her moving expenses are not deductible because she has changed employment status (i.e.,went from self-employed to employee).
A)True
B)False
Q3) Which,if any,of the following expenses is subject to the 2%-of-AGI floor?
A) Qualified tuition expenses under § 222.
B) Contribution to traditional IRA.
C) Cost of a CPA exam review course-taxpayer just began employment with an accounting firm.
D) Office in the home deduction for a self-employed taxpayer.
E) None of the above.
Q4) How are combined business/pleasure trips treated for travel within the United States as opposed to foreign travel?
Page 11
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) Contributions to public charities in excess of 50% of AGI may be carried back 3 years or forward for up to 5 years.
A)True
B)False
Q2) Maria traveled to Rochester,Minnesota,with her son,who was operated on at the Mayo Clinic.Her son stayed at the clinic for the duration of his treatment.She paid airfare of $300 and $50 per night for lodging.The cost of Maria's airfare and lodging cannot be included in determining her medical expense deduction.
A)True
B)False
Q3) In 2012,Allison drove 800 miles to volunteer in a project sponsored by a qualified charitable organization in Utah.In addition,she spent $250 for meals while away from home.In total,Allison may take a charitable contribution deduction of $112 (800 miles ´ $.14).
A)True
B)False
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Chapter 11: Investor Losses
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Sample Questions
Q1) Joe participates 95 hours in an activity,while an employee participates 5 hours.Joe has materially participated in the activity.
A)True
B)False
Q2) Dena owns interests in five businesses and has full-time employees in each business.She participates for 100 hours in Activity A,120 hours in Activity B,130 hours in Activity C,140 hours in Activity D,and 125 hours in Activity E.
A)All five of Dena's activities are significant participation activities. B)Dena is a material participant with respect to all five activities. C)Dena is not a material participant in any of the activities. D)Dena is a material participant with respect to Activities B,C,D,and E. E)None of the above.
Q3) Green,Inc.,a closely held personal service corporation,has the following transactions in the current year: $100,000 of passive losses,$80,000 of active business income,and $20,000 of portfolio income.How much of the passive loss may Green use to offset other types of income this year?
Q4) When a taxpayer disposes of a passive activity by death,what happens to any unused passive losses?
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Page 13
Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) What itemized deductions are allowed for both regular income tax purposes and for AMT purposes?
Q2) Certain adjustments apply in calculating the corporate AMT that do not apply in calculating the noncorporate AMT and certain adjustments apply in calculating the noncorporate AMT that do not apply in calculating the corporate AMT.
A)True
B)False
Q3) Wallace owns a construction company that builds both commercial and residential buildings.He contracts to build a residential building for $800,000 for which he is eligible to use the completed contract method of accounting.In the current year for regular income tax purposes,Wallace does not recognize any income on the contract.Under the percentage of complete method,the income recognized under the contract would have been $60,000.Wallace's AMT adjustment is:
A) $0.
B) $60,000 negative adjustment.
C) $60,000 positive adjustment.
D) $800,000 positive adjustment.
E) None of the above.
Q4) Why is there a need for a second tax system called the alternative minimum tax?
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Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) During the year,Purple Corporation (a U.S.Corporation)has U.S.-source income of $900,000 and foreign income of $300,000.The foreign-source income generates foreign income taxes of $75,000.The U.S.income tax before the foreign tax credit is $408,000.Purple Corporation's foreign tax credit is:
A) $56,250.
B) $75,000.
C) $102,000.
D) $408,000.
E) None of the above.
Q2) Certain high-income individuals are subject to three additional Medicare taxes beginning in 2013-on wages,unearned income,and tax credits claimed.
A)True
B)False
Q3) Child care payments to a relative are not eligible for the credit for child and dependent care expenses if the relative is a child (under age 19)of the taxpayer.
A)True
B)False
Q4) Describe the withholding requirements applicable to employers.
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Page 15
Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Sample Questions
Q1) If property that has been converted from personal use to business use has appreciated in value,its basis for gain will be the same as the basis for loss.
A)True
B)False
Q2) Which of the following statements is false?
A) A realized gain that is never recognized results in the temporary recovery of more than the taxpayer's cost or other basis for tax purposes.
B) A realized gain on which recognition is postponed results in the temporary recovery of more than the taxpayer's cost or other basis for tax purposes.
C) A realized loss that is never recognized results in the permanent recovery of less than the taxpayer's cost or other basis for tax purposes.
D) A realized loss on which recognition is postponed results in the temporary recovery of less than the taxpayer's cost or other basis for tax purposes.
E) All of the above.
Q3) Describe the relationship between the recovery of capital doctrine and the realized and recognized gain and loss concepts.
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Page 16
Chapter 15: Property Transactions: Nontaxable Exchanges
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Sample Questions
Q1) On October 1,Paula exchanged an apartment building (adjusted basis of $375,000 and subject to a mortgage of $125,000)for another apartment building owned by Nick (fair market value of $550,000 and subject to a mortgage of $125,000).The property transfers were made subject to the mortgages.What amount of gain should Paula recognize?
A) $0.
B) $25,000.
C) $125,000.
D) $175,000.
E) None of the above.
Q2) Which of the following types of exchanges of insurance contracts qualify for nonrecognition treatment under § 1035?
A) Exchange of life insurance contracts.
B) Exchange of a life insurance contract for an endowment or annuity contract.
C) Exchange of an endowment contract for an annuity contract.
D) Only a. and b.
E) a., b., and c.
Q3) Mandy and Greta form Tan,Inc.,by transferring the following assets to the corporation in exchange for 5,000 shares of stock each.
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Page 17
Chapter 16: Property Transactions: Capital Gains and Losses
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Sample
Questions
Q1) Original issue discount is amortized over the life of the bond. A)True
B)False
Q2) Ranja acquires $200,000 face value corporate bonds for $186,000 when the bonds are issued.He holds the bonds as an investment for two years and then sells them for $198,000.He amortizes $2,000 of the OID.What tax issues does Ranja have with respect to these bonds?
Q3) A security that is a capital asset becomes worthless.The loss is deemed to have occurred on the day that the security was declared worthless.
A)True
B)False
Q4) 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
Q5) If a capital asset is sold at a loss,the holding period is important. A)True
B)False
Page 18
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Chapter 17: Property Transactions: Section 1231 and Recapture Provisions
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Sample Questions
Q1) Describe the circumstances in which the potential § 1245 depreciation recapture is extinguished.
Q2) A business taxpayer trades in a used fully depreciated machine on a replacement machine.Because the machine traded in was worth more than the replacement machine,the taxpayer received cash in the transaction.Assume the used machine originally cost $100,000,was worth $32,000 when it was traded in,and the replacement machine was worth $20,000.Consequently,the taxpayer received $12,000 cash in the transaction.Is there recognized gain in this transaction and,if so,what type of gain?
Q3) An individual business taxpayer owns land on which he grows trees for logging.The land has been held more than 10 years and the trees growing on the land were planted eight years ago.Normally,the timber would be inventory for this taxpayer,but the tax law allows the taxpayer to elect to treat cutting the timber as the disposition of a § 1231 asset.
A)True
B)False
Q4) The Code contains two major depreciation recapture provisions-§§ 1245 and 1250.
A)True
B)False
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Chapter 18: Accounting Periods and Methods
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Q1) 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
Q2) For a taxpayer who is required to use the percentage of completion method,the taxpayer can elect to defer the recognition of income and the related costs until the taxable year in which cumulative contract costs are at least 25 percent of the estimated contract costs.
A)True
B)False
Q3) Which of the following taxpayers is required to use the accrual method of accounting?
A) A retail business with average annual gross receipts of $800,000.
B) A medical doctor with average annual gross receipts of $2 million.
C) An insurance agency with average annual gross receipts of $2 million.
D) All of the above are required to use the accrual method.
E) None of the above is required to use the accrual method.
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Page 20
Chapter 19: Deferred Compensation
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Q1) What is a defined contribution plan?
Q2) A qualified plan must provide,at a minimum,that all employees in the covered group who are 21 years of age are eligible to participate after completing one year of service.
A)True
B)False
Q3) Under a nonqualified stock option (NQSO)plan which is granted to Damon on March 15,2010,he may purchase 200 shares of stock from his employer at $15 per share.At that date,the option does not have a readily ascertainable fair market value.Eight months later on the date of exercise the fair market value of the stock is $20.On December 1,2012,Damon sells 100 shares for $24 each.Which of the following would be the result of these transactions on the date of exercise and the date of sale?
A) Ordinary income of $1,000 and a long-term capital gain of $400.
B) Ordinary income of $1,200 and a long-term capital gain of $300.
C) Ordinary income of $2,400 and a long-term capital gain of $0.
D) Ordinary income of $1,000 and a short-term capital gain of $400.
E) None of the above.
Q4) Compare a § 401(k)plan with an IRA.
Q5) A qualified pension and profit sharing plan must satisfy which requirements?
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Chapter 20: Corporations and Partnerships
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Q1) The domestic production activities deduction (DPAD)for a corporation is 9% of the greater of QPAI or TI.
A)True
B)False
Q2) Laurie is a 70% shareholder in Martin Ltd.,a calendar year S corporation.As of January 1,2012,Laurie's basis in her stock investment was $400,000.During 2012,she made an additional capital contribution to Martin of $90,000 and also loaned the corporation $80,000.During 2012,Martin Ltd.had an operating loss of $900,000.One of the results of these transactions as to 2012 is that:
A) Laurie can recognize a loss of $400,000.
B) Laurie can recognize a loss of $490,000.
C) Laurie can recognize a loss of $630,000.
D) As of January 1, 2013, Laurie's basis in her stock is a negative $60,000.
E) None of the above.
Q3) Like S corporations,partnerships serve as conduits for their owners.
A)True
B)False
Q4) What causes a partner's basis in a partnership interest to fluctuate?
Q5) When might an NOL carryback to prior years be ill-advised?
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