Federal Taxation Test Bank
Course Introduction
Federal Taxation provides students with a comprehensive understanding of the principles and applications of federal tax laws in the United States. This course explores the structure and function of the Internal Revenue Code, tax regulations, and administrative rulings, focusing on income determination, deductions, credits, and property transactions for individuals and businesses. Through case studies and practical examples, students learn how to interpret tax statutes, analyze federal tax issues, and prepare basic returns while gaining insight into the ethical and legal considerations of tax compliance. The course prepares students for further study in tax law and equips them with essential skills for careers in accounting, finance, and business.
Recommended Textbook
South Western Federal Taxation 2018 Individual Income Taxes 41st Edition by William H. Hoffman
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20 Chapters
2583 Verified Questions
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Chapter 1: An Introduction to Taxation and Understanding
Federal Tax Law
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194 Verified Questions
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Sample Questions
Q1) Because the law is complicated, most individual taxpayers are not able to complete their Federal income tax returns without outside assistance.
A)True
B)False
Answer: True
Q2) A deduction for qualified tuition paid to obtain higher education.
Answer: d
Q3) Tax credits available for the purchase of a vehicle that uses alternative (non-fossil) fuels.
Answer: a
Q4) Allowing a domestic production activities deduction for certain manufacturing income can be justified:
A)As mitigating the effect of the annual accounting period concept.
B)As promoting administrative feasibility.
C)By economic considerations.
D)Based on the wherewithal to pay concept.
E)None of these.
Answer: C
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Chapter 2: Working With the Tax Law
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Sample Questions
Q1) The test for whether a child qualifies for dependency status is first conducted under the qualified child requirement.
A)True
B)False
Answer: True
Q2) What statement is not true with respect to Temporary Regulations?
A)May not be cited as precedent.
B)Issued with Proposed Regulations.
C)Automatically expire within three years after the date of issuance.
D)Found in the Federal Register.
E)All of these statements are true.
Answer: A
Q3) Which item may not be cited as a precedent?
A)Regulations
B)Temporary Regulations
C)Technical Advice Memoranda
D)U.S. District Court decision
E)None of these
Answer: C
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Page 4
Chapter 3: Tax Formula and Tax Determination; an
Overview of Property Transactions
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Sample Questions
Q1) Multiple support agreement
Answer: j
Q2) Surviving spouse
Answer: i
Q3) In terms of the tax formula applicable to individual taxpayers, which, if any, of the following statements is correct?
A)In arriving at AGI, a taxpayer must elect between claiming deductions for AGI and deductions from AGI.
B)In arriving at taxable income, a taxpayer must elect between claiming deductions for AGI and deductions from AGI.
C)If a taxpayer has deductions for AGI, the standard deduction is not available.
D)In arriving at taxable income, a taxpayer must elect between deductions for AGI and the standard deduction.
E)None of these.
Answer: E
Q4) A granddaughter, who lives with taxpayer, is 19 years old, earns $5,000, and is not a full-time student.
Answer: d
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Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) A sole proprietorship purchased an asset for $1,000 in 2016 and its value was $1,500 at the end of 2016. In 2017, the sole proprietorship sold the asset for $1,400. The sole proprietorship realized a taxable gain of $400 in 2017 but an economic loss of $100 in 2017.
A)True
B)False
Q2) Katherine is 60 years old and is bargaining with her employer over deferred compensation. In exchange for reducing her current year's salary by $50,000, she can receive a lump-sum amount in 5 years, when she will retire. If she receives the $50,000 in the current year, she will invest in certificates of deposit that yield 5%. Katherine is in the 28% marginal tax bracket in all relevant years. What is the minimum amount Katherine should accept as a deferred pay option? [Hint: the compound interest factor is 1.1934.]
Q3) The B & W Partnership earned taxable income of $140,000 for the year. Bryan is entitled to 50% of the profits, but Bryan withdrew only $60,000 during the year. Bryan's gross income from the partnership for the year is $60,000.
A)True B)False
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Chapter 5: Gross Income: Exclusions
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Sample Questions
Q1) Matilda works for a company with 1,000 employees. The company has a hospitalization insurance plan that covers all employees. However, the employee must pay the first $3,000 of his or her medical expenses each year. Each year, the employer contributes $1,500 to each employee's health savings account (HSA). Matilda's employer made the contributions in 2016 and 2017, and the account earned $100 interest in 2017. At the end of 2017, Matilda withdrew $3,100 from the account to pay the deductible portion of her medical expenses for the year and other medical expenses not covered by the hospitalization insurance policy. As a result, Matilda must include in her 2017 gross income:
A)$0.
B)$100.
C)$1,600.
D)$3,100.
E)None of these.
Q2) Ashley received a scholarship to be used as follows: tuition $6,000; room and board $9,000; and books and laboratory supplies $2,000. Ashley is required to include only $9,000 in her gross income.
A)True
B)False
Q3) 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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Sample Questions
Q1) During 2016, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees have earned salaries of $20,000, which are not paid by Silver until early in 2017. What is the amount of the deduction for salary expense?
A)If Silver uses the cash method, $175,000 in 2016 and $0 in 2017.
B)If Silver uses the cash method, $0 in 2016 and $195,000 in 2017.
C)If Silver uses the accrual method, $175,000 in 2016 and $20,000 in 2017.
D)If Silver uses the accrual method, $195,000 in 2016 and $0 in 2017.
E)None of the above is correct.
Q2) 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
Q3) Ordinary and necessary business expenses, other than cost of goods sold, of an illegal drug trafficking business do not reduce taxable income.
A)True
B)False
Q4) Are all personal expenses disallowed as deductions?
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Page 8
Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) If personal casualty gains exceed personal casualty losses (after deducting the $100 floor), there is no itemized deduction.
A)True
B)False
Q2) How is qualified production activities income (QPAI) calculated?
Q3) Discuss the treatment, including the carryback and carryforward periods, of casualty losses incurred with personal use property.
Q4) Regarding research and experimental expenditures, which of the following are not qualified expenditures?
A)Costs of ordinary testing of materials.
B)Costs to develop a plant process.
C)Costs of developing a formula.
D)Depreciation on a building used for research.
E)All of the above are qualified expenditures.
Q5) A bond held by an investor that is uncollectible will be treated as a worthless security and hence, produce a capital loss.
A)True
B)False
9
Q6) Why was the domestic production activities deduction (DPAD) enacted by Congress?
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Page 10
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, 2017, at a cost of $30,000. She also purchased a new business asset (seven-year property) on November 20, 2017, 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 2017 for these assets.
A)$5,858
B)$7,464
C)$9,586
D)$19,429
E)None of the above
Q2) Norm purchases a new sports utility vehicle (SUV) on October 12, 2017, for $60,000. The SUV has a gross vehicle weight of 6,200 lbs. It is used 100% of the time for business and it is the only business asset acquired by Norm during 2017. Compute the maximum deduction with respect to the SUV for 2017. Norm does not take additional first-year depreciation.
Q3) Discuss the beneficial tax consequences of an SUV not being classified as a passenger automobile.
Q4) Discuss the reason for the inclusion amount with respect to leased automobiles. To view all questions and flashcards with answers, click on the resource link above.
Page 11
Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) Qualifying job search expenses are deductible even if the taxpayer does not change jobs.
A)True
B)False
Q2) Tax home has changed
Q3) Characteristic of a taxpayer who is self-employed
Q4) Under the regular (actual expense) method, the portion of the office in the home deduction that exceeds the income from the business can be carried over to future years.
A)True B)False
Q5) Logan, Caden, and Olivia are three unrelated parties who claim the standard deduction. All are married and attend Citron University and each pays tuition of $6,100. Of this payment, Logan can claim a deduction of $4,000; Caden a deduction of $2,000; and Olivia no deduction at all. Explain.
Q6) 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
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) A phaseout of certain itemized deductions applies for all taxpayers who choose to itemize their deductions.
A)True B)False
Q2) Shirley sold her personal residence to Mike for $400,000. Before the sale, Shirley paid the real estate taxes of $7,030 for the calendar year. For income tax purposes, the deduction is apportioned as follows: $4,000 to Shirley and $3,030 to Mike.
a. What is Mike's basis in the residence?
b. What is Shirley's amount realized from the sale of the residence?
c. What amount of real estate taxes can Mike deduct?
d. What amount of real estate taxes can Shirley deduct?
Q3) Letha incurred a $1,600 prepayment penalty to a lending institution because she paid off the mortgage on her home early. The $1,600 is deductible as interest expense.
A)True B)False
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Chapter 11: Investor Losses
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Sample Questions
Q1) Pat sells a passive activity for $100,000 that has an adjusted basis of $55,000. During the years of her ownership, $60,000 of losses have been incurred that were suspended under the passive activity loss rules. In addition, the passive activity generated tax credits of $10,000 that were not utilized and suspended. Determine the tax treatment to Pat on the disposition of the property.
Q2) In 2017, Joanne invested $90,000 for a 20% interest in a limited liability company (LLC) in which she is a material participant. The LLC reported losses of $340,000 in 2017 and $180,000 in 2018. Joanne's share of the LLC's losses was $68,000 in 2017 and $36,000 in 2018. How much of these losses can Joanne deduct?
A)$68,000 in 2017; $36,000 in 2018.
B)$68,000 in 2017; $22,000 in 2018.
C)$0 in 2017; $0 in 2018.
D)$68,000 in 2017; $0 in 2018.
E)None of the above.
Q3) Treatment of a disposition of a passive activity by gift.
Q4) Discuss the treatment given to suspended passive activity losses and credits. What happens to an activity's unused losses and credits when the activity is sold?
Q5) Active participation.
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Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) The recognized gain for regular income tax purposes and the recognized gain for AMT purposes on the sale of stock acquired with an incentive stock option (ISO) are always the same, because the adjusted basis is the same.
A)True
B)False
Q2) Dale owns and operates Dale's Emporium as a sole proprietorship. On January 30, 2003, Dale's Emporium acquired a warehouse for $100,000. For regular income tax purposes in 2017, depreciation was deducted under MACRS using a 2.564% rate. Determine the AMT adjustment for depreciation and indicate whether it is positive or negative.
A)$64 negative adjustment.
B)$64 positive adjustment.
C)No adjustment is required because Dale's Emporium used the Alternative Depreciation System (ADS) to compute depreciation on the property for AMT purposes.
D)No adjustment is required because Dale's Emporium used MACRS to compute the depreciation of the property for regular income tax purposes.
Q3) What is the relationship between taxable income and AMTI?
Q4) What tax rates apply in calculating the TMT for an individual taxpayer?
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Page 15
Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) If the cost of a building constructed and placed into service by an eligible small business in the current year includes the cost of a wheelchair ramp, the cost of the ramp qualifies for the disabled access credit.
A)True
B)False
Q2) During the year, Purple Corporation (a U.S. Corporation) has U.S.-source income of $1,800,000 and foreign income of $600,000. The foreign-source income generates foreign income taxes of $150,000. The U.S. income tax before the foreign tax credit is $816,000. Purple Corporation's foreign tax credit is:
A)$112,500.
B)$150,000.
C)$204,000.
D)$816,000.
Q3) In the event that overwithholding of FICA tax occurs because the taxpayer has more than one employer, the excess amount should be claimed as a credit on the Federal income tax return of the employee.
A)True
B)False
Q4) 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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Sample Questions
Q1) Arthur owns a tract of undeveloped land (adjusted basis of $145,000) which he sells to his son, Ned, for its fair market value of $105,000. What is Arthur's recognized gain or loss and Ned's basis in the land?
A)$0 and $105,000.
B)$0 and $145,000.
C)($40,000) and $105,000.
D)($40,000) and $145,000.
E)None of the above.
Q2) Which of the following is correct?
A)The gain basis for property received by gift is the lesser of the donor's adjusted basis or the fair market value on the date of the gift.
B)The loss basis for property received by gift is the same as the donor's basis.
C)The gain basis for inherited property is the same as the decedent's basis.
D)The loss basis for inherited property is the lesser of the decedent's basis or the fair market value on the date of the decedent's death.
E)None of the above.
Q3) For disallowed losses on related-party transactions, who has the right of offset?
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Page 17
Chapter 15: Property Transactions: Nontaxable Exchanges
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Sample Questions
Q1) Gil's office building (basis of $225,000 and fair market value $275,000) is destroyed by a hurricane. Due to a 30% co-insurance clause, Gil receives insurance proceeds of $192,500 two months after the date of the loss. One month later, Gil uses the insurance proceeds to purchase a new office building for $275,000. His adjusted basis for the new building is $307,500 ($275,000 cost + $32,500 postponed loss).
A)True
B)False
Q2) Which of the following statements is correct?
A) The receipt of boot in a § 1031 like-kind exchange can result in the recognition of gain.
B) The receipt of boot in a § 1031 like-kind exchange cannot result in the recognition of loss.
C) The giving of boot in a § 1031 like-kind exchange can result in the recognition of gain.
D) Only a. and b.
E) a., b., and c.
Q3) How does the replacement time period differ for the condemnation of real property used in a trade or business or held for investment when compared with that for other involuntary conversions?
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Chapter 16: Property Transactions: Capital Gains and Losses
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Sample Questions
Q1) A lessor is paid $45,000 by its commercial tenant as a lease cancellation fee. The tenant wanted to get out of its lease so it could move to a different building. The lessor had held the lease for three years before it was canceled. The lessor had a zero tax basis for the lease. The lessor has received:
A)Ordinary income of $45,000.
B)Long-term capital gain of $45,000.
C)Short-term capital gain of $45,000.
D)Neither gain nor loss.
E)None of the above.
Q2) In 2013, Aaron purchased a classic car that he planned to restore for $12,000. However, Aaron is too busy to work on the car and he gives it to his daughter Ellie in 2017. At this time, the fair market value of the car has declined to $10,000. Aaron paid no gift tax on the transaction. Ellie completes some of the restoration herself with out-of-pocket costs of $5,000. She later sells the car for $30,000. What is Ellie's recognized gain or loss on the sale of the car?
Q3) Short-term capital gain is eligible for a special tax rate only when it exceeds long-term capital gain.
A)True
B)False
Page 19
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Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Sample Questions
Q1) Depreciable personal property was sold at a gain in 2016. On what 2016 form would this transaction be reported, where initially in that form, and what will the form most likely do with the gain?
Q2) Which of the following statements is correct?
A)When depreciable property is gifted to another individual taxpayer, the depreciation recapture potential is extinguished.
B)When depreciable property is inherited by a taxpayer, the depreciation recapture potential is extinguished.
C)When corporate depreciable property is distributed as a dividend, the depreciation recapture potential is generally not recognized.
D)When depreciable property is contributed to charity, the depreciation recapture potential has no effect on the amount of the charitable contribution deduction.
E)All of the above are correct.
Q3) Involuntary conversion gains may be deferred if the proceeds of the involuntary conversion are reinvested.
A)True
B)False
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Page 20
Chapter 18: Accounting Periods and Methods
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Sample Questions
Q1) A cash basis taxpayer sold investment land in 2016 for $200,000. He received $40,000 in the year of sale and $160,000 in 2017. The cost of the land was $80,000. Under the installment method, the taxpayer would report a $24,000 gain in 2016.
A)True
B)False
Q2) The Seagull Partnership has three equal partners. Partner A's tax year ends June 30th, and Partners B and C use a calendar year. If the partnership uses the calendar year to report its income, Partner A is permitted to defer partnership income earned from July through December 2016 until he files his tax return for his year ending June 30, 2017.
A)True
B)False
Q3) The company has consistently used the LIFO inventory method and has deferred over $1 million of income from using that method. However, in the last two years, the prices it pays for goods has been decreasing. Therefore, the company is considering changing to the FIFO inventory method. What would be some tax consequences of the change?
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Chapter 19: Deferred Compensation
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Q1) Contributions to a Roth IRA can be made up to the due date (excluding extensions) of the taxpayer's income tax return.
A)True
B)False
Q2) Zackie has five years of service completed as of February 5, 2017, which is his employment anniversary date. If his defined benefit plan [not a § 401(m) arrangement] uses the graded vesting rule, determine Zackie's nonforfeitable percentage.
A)40%
B)60%
C)80%
D)100%
E)None of the above
Q3) A company is denied a deduction for a golden parachute payment to an employee, but not for a golden parachute payment to an independent contractor.
A)True
B)False
Q4) Explain to a small business owner some advantages and disadvantages of a simplified employee pension plan (SEP).
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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, 2017, Jack's basis in his partnership interest is $100,000. Gull's operating results are: $400,000 loss for 2017 and $300,000 profit for 2018.
a.What is Jack's basis for his partnership interest as of January 1, 2018?
b.What is Jack's basis for his partnership interest as of January 1, 2019?
Q2) A corporation that claims the dividends received deduction may completely or only partly avoid any tax on the dividends involved. What accounts for the difference in tax consequences?
Q3) Currently all C corporations must file a Schedule M-3 with Form 1120.
A)True
B)False
Q4) Property distributions to shareholders can result in the distributing corporation recognizing gains and losses.
A)True
B)False
Q5) Some corporations (e.g., personal service corporations) cannot use a calendar year for tax purposes.
A)True
B)False
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