Federal Taxation I Exam Materials
Course Introduction
Federal Taxation I provides a comprehensive introduction to the principles and practices of federal income taxation as applied to individuals. The course covers topics such as gross income, deductions, exemptions, tax credits, property transactions, and the procedures for filing federal tax returns. Emphasis is placed on understanding the Internal Revenue Code, interpreting tax regulations, and applying tax law to real-life scenarios. Students will develop foundational skills necessary for personal and professional tax planning, as well as the technical knowledge required for further study in taxation.
Recommended Textbook
South Western Federal Taxation 2017 Individual Income Taxes 40th Edition by William H. Hoffman
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Page 2
Chapter 1: An Introduction to Taxation and Understanding
the Federal Law
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Q1) Under state amnesty programs,all delinquent and unpaid income taxes are forgiven. A)True
B)False Answer: False
Q2) Sales made by mail order are not exempt from the application of a general sales (or use)tax.
A)True
B)False Answer: True
Q3) Use tax Answer: h
Q4) Before the Sixteenth Amendment to the Constitution was ratified,there was no valid Federal income tax on individuals.
A)True
B)False Answer: False
Q5) A deduction for certain expenses (interest and taxes)incident to home ownership. Answer: a
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Chapter 2: Working With the Tax Law
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Q1) Which of the following court decisions carries more weight?
A)Federal District Court
B)Second Circuit Court of Appeals
C)U.S.Tax Court decision
D)Small Cases Division of U.S.Tax Court
E)U.S.Court of Federal Claims
Answer: B
Q2) A Revenue Ruling is a judicial source of Federal tax law.
A)True
B)False Answer: False
Q3) Arizona is in the jurisdiction of the Eighth Circuit Court of Appeals.
A)True
B)False Answer: False
Q4) Technical Advice Memoranda deal with completed transactions.
A)True
B)False Answer: True
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Chapter 3: Tax Formula and Tax Determination an
Overview of Property Transactions
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Sample Questions
Q1) A daughter who does not live with taxpayer.
Answer: b
Q2) Merle is a widow,age 80 and blind,who is claimed as a dependent by her son.During 2016,she received $4,800 in Social Security benefits,$2,500 in bank interest,and $1,800 in cash dividends from stocks.Merle's taxable income is:
A)$4,300 - $1,050 - $3,100 = $150.
B)$4,300 - $3,100 = $1,200.
C)$4,300 - $1,050 - $1,550 = $1,700.
D)$9,100 - $1,050 - $3,100 = $4,950.
E)None of these.
Answer: A
Q3) Relationship test (for dependency exemption purposes)
Answer: f
Q4) $1,050
Answer: c
Q5) Kiddie tax may be imposed
Answer: g
Q6) Average income tax rate
Answer: b
Page 5
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Chapter 4: Gross Income Concepts and Inclusions
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Sample Questions
Q1) Teal company is an accrual basis taxpayer.On December 1,2016,a customer paid for an item that was on hand,but the customer wanted the item delivered in early January 2017.Teal delivered the item on January 4,2017.Teal included the sale in its 2016 income for financial accounting purposes.
A)Teal must recognize the income in 2016.
B)Teal must recognize the income in the year title to the goods passed to the customer,as determined under the state laws in which the store is located.
C)Teal can elect to recognize the income in either 2016 or 2017.
D)Teal must recognize the income in 2017.
E)None of these.
Q2) Our tax laws encourage taxpayers to ____ assets that have appreciated in value and ____ assets that have declined in value.
A)sell;keep.
B)sell;sell.
C)keep;sell.
D)keep;keep.
E)None of these.
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Page 7
Chapter 5: Gross Income Exclusions
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Sample Questions
Q1) If a tax-exempt bond will yield approximately .65 (1 - .35)times the yield on a taxable bond of equal risk,who benefits from the tax exemption: the Federal government,the state and local governments who issue the bonds,or the investors?
Q2) Ridge is the manager of a motel.As a condition of his employment,Ridge is required to live in a room on the premises so that he would be there in case of emergencies.Ridge considered this a fringe benefit,since he would otherwise be required to pay $800 per month rent.The room that Ridge occupied normally rented for $70 per night,or $2,100 per month.On the average,90% of the motel rooms were occupied.As a result of this rent-free use of a room,Ridge is required to include in gross income.
A)$0.
B)$800 per month.
C)$2,100 per month.
D)$1,890 ($2,100 × .90).
E)None of these.
Q3) A U.S.citizen who works in France from February 1,2016 until January 31,2017 is eligible for the foreign earned income exclusion in 2016 and 2017.
A)True
B)False
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Chapter 6: Deductions and Losses in General
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Q1) If a taxpayer operates an illegal business,no deductions are permitted.
A)True
B)False
Q2) The Code does not specifically define what constitutes a trade or business.
A)True
B)False
Q3) What is the appropriate tax treatment for expenditures paid by a taxpayer for another's benefit?
Q4) Investigation of a business unrelated to one's present business never results in a current period deduction of the entire amount if the amount of the investigation expenses exceeds $5,000.
A)True
B)False
Q5) Are there any exceptions to the rule that personal expenditures cannot be deducted?
Q6) Salaries are considered an ordinary and necessary expense of a trade or business if they meet what other requirement? What are the tax consequences if this requirement is not met?
Q7) Are all personal expenses disallowed as deductions?
Q8) 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) Mike,single,age 31,had the following items for 2016:
Salary
$50,000
Nonbusiness bad debt (6,000)
Casualties-independent events
Asset A (personal use property held for two years)-gain
3,000
Securities (stolen)-loss (8,000)
Dividends
2,000
Interest expense on personal residence 10,000
Compute Mike's taxable income for 2016.
Q2) The amount of loss for partial destruction of business property is the decline in fair market value of the business property.
A)True
B)False
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Chapter 8: Depreciation Cost Recovery Amortization and Depletion
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Sample Questions
Q1) Bonnie purchased a new business asset (five-year property)on March 10,2016,at a cost of $30,000.She also purchased a new business asset (seven-year property)on November 20,2016,at a cost of $13,000.Bonnie did not elect to expense either of the assets under § 179,nor did she elect straight-line cost recovery.Bonnie takes additional first-year depreciation.Determine the cost recovery deduction for 2016 for these assets.
A)$5,858
B)$7,464
C)$9,586
D)$19,429
E)None of the above
Q2) Rick purchased a uranium interest for $10,000,000 on January 3,2016,when recoverable reserves were estimated at 200,000 units.A total of 10,000 units were extracted in 2016 and 7,000 units were sold in 2016.Gross income from the property was $2,800,000 and taxable income without the allowance for depletion was $1,000,000.Determine the depletion deduction for 2016.
Q3) Antiques may be eligible for cost recovery if they are used in a trade or business.
A)True
B)False
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Chapter 9: Deductions Employee and Self Employed
Related Expenses
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Sample Questions
Q1) James has a job that compels him to go to many different states during the year.It is possible that James was never away from his tax home during the year.
A)True
B)False
Q2) Tired of renting,Dr.Smith buys the academic robes she will wear at her college's graduation procession.The cost of this attire does not qualify as a uniform expense.
A)True
B)False
Q3) In connection with the office in the home deduction,comment on the following:
a.Mixed use (i.e. ,business and personal)of the portion of the home allocated to business. b.The difference between direct and indirect expenses for deduction purposes. c.The classification of the expense (i.e. ,dfor or dfrom AGI).
Q4) Club dues not deductible
Q5) A taxpayer who claims the standard deduction will not avoid the 2%-of-AGI floor on unreimbursed employee expenses.
A)True
B)False
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Chapter 10: Deduction and Losses Certain Itemized
Deductions
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Sample Questions
Q1) A taxpayer pays points to obtain financing to purchase a second residence.At the election of the taxpayer,the points can be deducted as interest expense for the year paid.
A)True
B)False
Q2) 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
Q3) For all of the current year,Randy (a calendar year taxpayer)allowed the Salvation Army to use a building he owns rent-free.The building normally rents for $24,000 a year.Randy will be allowed a charitable contribution deduction this year of $24,000. A)True
B)False
Q4) Linda borrowed $60,000 from her parents for a down payment on a condominium.She paid interest of $5,500 in 2014,$0 in 2015,and $9,000 in 2016.The IRS disallowed the deduction.Can you offer any explanation for the disallowance?
Page 13
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Chapter 11: Investor Losses
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Sample Questions
Q1) Jenny spends 32 hours a week,50 weeks a year,operating a bicycle rental store that she owns at a resort community.She also owns a music store in another city that is operated by a full-time employee.Jenny spends 140 hours per year working at the music store.She elects not to group them together as a single activity under the "appropriate economic unit" standard.
A)Neither store is a passive activity.
B)Both stores are passive activities.
C)Only the bicycle rental store is a passive activity.
D)Only the music store is a passive activity.
E)None of the above.
Q2) Vail owns interests in a beauty salon,a natural foods store,and a tanning salon.Several full-time employees work at each of the enterprises.As of the end of November of the current year,Vail has worked 180 hours in the beauty salon,220 hours at the natural foods store,and 80 hours at the tanning salon.These three ventures collectively will produce income.Vail also owns one other passive activity that is producing a loss (a limited partnership in which she has reported no participation).How should Vail plan her activities for the remainder of the year?
Q3) Significant participation activity.
Q4) Treatment of a disposition of a passive activity by gift.
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Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) In calculating the AMT using the indirect method,do AMT adjustments and AMT preferences increase or decrease AMTI?
Q2) The net capital gain included in an individual taxpayer's AMT base is eligible for the beneficial lower tax rate on net capital gain.This favorable alternative rate applies both in calculating the regular income tax and the AMT.
A)True
B)False
Q3) Akeem,who does not itemize,incurred a net operating loss (NOL)of $50,000 in 2015.His deductions in 2015 included AMT tax preference items of $20,000,and he had no AMT adjustments.Assuming the NOL is not carried back,what is Akeem's ATNOLD carryover to 2015?
A)$50,000
B)$30,000
C)$20,000
D)$40,000
E)None of the above
Q4) The sale of business property might result in an AMT adjustment.
A)True
B)False
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Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) The ceiling amounts and percentages for 2016 for the two portions of the self-employment tax are:
Social Security portion Medicare portion
A)$118,500;12.4% Unlimited;2.9%
B)$118,500;15.3% Unlimited;2.9%
C)$117,000;12.4% Unlimited;2.9%
D)$117,000;2.9% Unlimited;13.3%
Q2) In May 2016,Blue Corporation hired Camilla,Jolene,and Tyrone,all of whom are certified as long-term family assistance recipients.Each employee is paid $12,000 during 2016.Camilla and Tyrone continued to work for Blue Corporation in 2017,earning $14,000 each.Blue hired no additional employees during 2017.
a.Compute Blue Corporation's work opportunity tax credits for 2016 and 2017.
b.Assume Blue Corporation pays total wages of $500,000 to its employees during 2016 and $560,000 during 2017.How much may Blue Corporation claim as a wage deduction for 2016 and 2017 if the work opportunity tax credit is claimed in both years?
Q3) Explain the purpose of the disabled access credit and describe the general characteristics of its computation.
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Chapter 14: Property Transactions Determination of Gain and
Loss and Basic Considerations
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Sample Questions
Q1) When a property transaction occurs,what four questions should be considered with respect to the sale or other disposition?
Q2) A realized gain on the sale or exchange of a personal use asset is recognized,but a realized loss on the sale,exchange,or condemnation of a personal use asset is not recognized.
A)True
B)False
Q3) For a corporate distribution of cash or other property to a shareholder,when does dividend income or a return of capital result?
Q4) If the amount of a corporate distribution is less than the amount of the corporate earnings and profits,the return of capital concept does not apply and the shareholders' adjusted basis for the stock remains unchanged.
A)True
B)False
Q5) Explain how the sale of investment property at a loss to a brother is treated differently from a sale to a nephew.
Q6) For disallowed losses on related-party transactions,who has the right of offset?
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Q7) Define a bargain purchase of property and discuss the related tax consequences.
Chapter 15: Property Transactions Nontaxable Exchanges
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Sample
Questions
Q1) An office building with an adjusted basis of $320,000 was destroyed by fire on December 30,2016.On January 11,2017,the insurance company paid the owner $450,000.The fair market value of the building was $500,000,but under the co-insurance clause,the insurance company is responsible for only 90 percent of the loss.The owner reinvested $410,000 in a new office building on February 12,2017,that was smaller than the original office building.What is the recognized gain and the basis of the new building if § 1033 (nonrecognition of gain from an involuntary conversion)is elected?
A)$0 and $320,000.
B)$0 and $410,000.
C)$40,000 and $320,000.
D)$130,000 and 410,000.
E)None of the above.
Q2) In a nontaxable exchange,recognition is postponed.In a tax-free transaction,nonrecognition is permanent.
A)True
B)False
Q3) Discuss the treatment of realized gains from involuntary conversions.
Q4) What types of exchanges of insurance contracts are eligible for nonrecognition treatment under § 1035?
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Chapter 16: Property Transactions Capital Gains and Losses
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Sample Questions
Q1) Martha is unmarried with one dependent and files as head of household.She had 2016 taxable income of $45,000 which included $16,000 of 0%/15%/20% net long-term capital gain.What is her tax on taxable income using the alternative tax on net long-term capital gain method?
Q2) Gold Company signs a 13-year franchise agreement with Silver.Silver retained significant powers,rights,and a continuing interest.Gold Company (the franchisee)makes noncontingent payments of $18,000 per year for the first four years of the franchise.Gold Company also pays a contingent fee of 2% of gross sales every month.Which of the following statements is correct?
A)Gold Company may deduct the $18,000 per year noncontingent payments in full as they are made.
B)Gold Company may deduct the monthly contingent fee as it is paid.
C)Gold Company may deduct both the noncontingent annual fee and the contingent monthly fees as they are paid.
D)Gold Company may not deduct either the noncontingent annual fee or the contingent monthly fees as they are paid.
E)None of the above.
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Chapter 17: Property Transactions Section 1231 and Recapture Provisions
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Sample Questions
Q1) Section 1231 gain that is treated as long-term capital gain carries from the 2015 Form 4797 to the 2015 Form 1040,Schedule D,line ____.
A)8
B)9
C)10
D)11
E)None of the above
Q2) Residential real estate was purchased in 2013 for $345,000,held as rental property,and depreciated straight-line.Assume the land cost was $45,000 and the building cost was $300,000.Depreciation totaled $34,089.The building and land were sold on June 10,2016,for $683,000 total.What is the tax status of the property,the nature of the gain from the disposition,and is any of it § 1250 depreciation recapture gain or unrecaptured § 1250 gain?
Q3) A sheep must be held more than 18 months to qualify as a § 1231 asset.
A)True
B)False
Q4) Section 1231 property generally does not include artistic compositions.
A)True
B)False
Page 20
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Chapter 18: Accounting Periods and Methods
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Q1) Gray Company,a calendar year taxpayer,allows customers to return defective merchandise for a full refund within 30 days of the purchase.In 2016,the company refunded $400,000 for claims involving sales.The $400,000 consisted of $350,000 in refunds from 2016 sales and $50,000 in refunds from 2015 sales.All of the refunds from 2015 sales were for claims filed in 2015 and were paid in January and February 2016.At the end of 2016,the company had $12,000 in refund claims for sales in 2016 for which payment had been approved.These claims were paid in January 2016.Also in January 2016,the company received an additional $30,000 in claims for sales in 2016.This $30,000 was paid by Gray in February 2017.With respect to the above,Gray can deduct:
A)$350,000 in 2016.
B)$362,000 in 2016.
C)$392,000 in 2015.
D)$442,000 in 2016.
E)None of the above.
Q2) When an accrual basis taxpayer finances the construction of its building by borrowing,the interest is added to the cost of the building.
A)True
B)False
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Chapter 19: Deferred Compensation
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Sample Questions
Q1) Pony,Inc. ,issues restricted stock to employees in July 2016,with a two-year vesting period and an SRF.An employee must remain a full-time employee of Pony for two years after the restricted stock is issued.The stock is trading at $10 per share when the stock is issued.An employee,Sam,decides to make the § 83(b)election with his 1,000 shares.At the end of 2016,the stock is selling for $13 per share.What amount,if any,can Pony take as a compensation deduction?
A)$0.
B)$10,000 in 2016.
C)$13,000 in 2016.
D)$10,000 when stock is sold.
E)$13,000 when stock is sold.
Q2) A direct transfer of funds from a qualified retirement plan to an IRA is subject to the withholding rules.
A)True
B)False
Q3) What is a profit sharing plan?
Q4) What is a defined contribution plan?
Q5) Compare a § 401(k)plan with an IRA.
Q6) What is a highly compensated employee?
Page 22
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Chapter 20: Corporations and Partnerships
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Q1) Jack is a 40% partner in the Gull Partnership,a calendar year taxpayer.As of January 1,2016,Jack's basis in his partnership interest is $100,000.Gull's operating results are: $400,000 loss for 2016 and $300,000 profit for 2017.
a.What is Jack's basis for his partnership interest as of January 1,2017?
b.What is Jack's basis for his partnership interest as of January 1,2018?
Q2) Schedule M-2 of Form 1120 reconciles unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at year-end.
A)True
B)False
Q3) If a corporation does not choose to amortize its organizational expenditures,such expenses can never be deducted.
A)True
B)False
Q4) Even though partnerships are not subject to income tax,they are required to file income tax returns.
A)True
B)False
Q5) A resident and citizen of Mexico can be a shareholder.
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