Federal Taxation
Textbook Exam Questions
Course Introduction
Federal Taxation provides a comprehensive overview of the United States federal tax system with a focus on individual and business taxation. The course explores the fundamentals of income taxation, tax law sources, and the underlying principles used in the determination of taxable income and tax liabilities. Students will examine topics such as gross income, deductions, credits, property transactions, and the tax implications for various entities including corporations, partnerships, and sole proprietorships. Through case studies and practical examples, the course aims to develop skills in tax planning, compliance, and ethical considerations, preparing students for real-world applications in accounting, finance, and business management.
Recommended Textbook
Concepts in Federal Taxation 2017 24th Edition by Kevin E. Murphy
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Chapter 1: Federal Income Taxation-An Overview
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Q1) A taxpayer is responsible for determining his/her tax liability and timely paying the tax due.
A)Advalorem tax
B)Deduction
C)Excisetax
D)Exclusi on
E)Expense
F)Gain
G)Loss
H)Ordinary income
I)Pay-as-you-go concept
J)Personal property
K)Real property
L)Self-assessment
M)Standard deduction
N)Statute of limitations
O)Taxbase
P)Tax credit
Answer: L
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Chapter 2: Income Tax Concepts
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Q1) Kiki fell asleep one night while driving home from work and severely damaged her car.Repairs to the car cost $4,600.Her insurance company reimbursed her for $4,100 of the repairs.Has Kiki realized a loss? Under what conditions can she deduct the loss?
Answer: Kiki has realized a loss of $500 ($4,600 - $4,100)from the accident - a change in her wealth has occurred in an arm's-length transaction.However,all realized losses are not recognized for tax purposes.To deduct the loss,the car must have a business purpose.If the car is used solely for business purposes,Kiki can deduct the $500 loss.However,if the car is used for personal purposes,she may take a casualty loss of $500 as an itemized deduction,subject to applicable limitations.
Q2) Under the Wherewithal to Pay concept,income should be recognized and a tax paid on the income when the taxpayer has the resources to pay the tax.
A)True
B)False Answer: True
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Chapter 3: Income Sources
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Q1) Ronald,a single taxpayer,purchased 300 shares of Jasmine Inc.,stock on October 14,2014,for $4,000.He sells the stock on August 22,2016,for $2,000.Ronald has no other capital asset transactions in 2016.
I.If Ronald's taxable income without considering the stock sale is $93,000,the sale of the stock will decrease his income tax liability by $560.
II.If Ronald's taxable income without considering the stock sale is $13,000,the sale of the stock will decrease his income tax liability by $300.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Answer: C
Q2) Net collectibles gains are taxed at a maximum rate of 25 percent.
A)True
B)False
Answer: False
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Chapter 4: Income Exclusions
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Q1) Tina receives 100 shares of Welby stock as a result of a 2 for 1 stock split.The shares have a value of $7,000 the day of the split.
Q2) To keep the employees on the premises in case an emergency arises,the Riverview Hotel provides meals to its employees in a room adjacent to their restaurant.Since the meals are provided as a convenience to the employer and on their premises,the value of the meals is excluded in the income of the employees.
A)True
B)False
Q3) Jeane's medical insurance carrier reimburses him 80% of his qualified medical expenses.During the current year Jeane receives $3,682 in payments.
Q4) Sarah,the managing partner in an accounting firm,has her downtown parking space ($325/per month)paid by the firm.None of the accounting staff receive parking privileges.
Q5) Gifts received are not subject to income taxation; however the donor is subject to the gift tax rules on the making of a gift.
A)True
B)False
Q6) Marline receives $14 million in punitive damages for a personal physical injury.
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Chapter 5: Introduction to Business Expenses
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Q1) Twin City Manufacturing Corporation is an accrual basis taxpayer.Twin City Manufacturing provides medical insurance for its employees through a self-insured reimbursement plan.Twin City Manufacturing pays $100 per month per employee into the plan fund.The fund is then used to reimburse employees' medical expenses.During the current year,Twin City Manufacturing Corp.pays $12,000 into the fund and pays medical reimbursement claims of $10,600.
I.If Twin City Manufacturing is an accrual basis taxpayer it can deduct $12,000.
II.If Twin City Manufacturing is a cash basis taxpayer it can deduct $10,600.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) All of the following are a required test for the deduction of a business expense except?
A)GAAP approved.
B)Ordinary.
C)Necessary.
D)Business purpose.
E)Reasonable in amount.
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Chapter 6: Business Expenses
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Q1) To be deductible,meals and entertainment must be both an ordinary and necessary business expense and must be either directly related to or associated with the active conduct of an activity for which the taxpayer has a business purpose.
A)True
B)False
Q2) Drew incurs the following expenses in his grocery store business.Drew can deduct the following as business expenses in the current year
I.$3,750 for advertising on the web.
II.$2,000 of interest expense related to the purchase of a new delivery truck.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) A taxpayer can deduct multiple gifts to a single customer as long as the total value of all gifts to that customer does not exceed $25.
A)True
B)False
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Chapter 7: Losses-Deductions and Limitations
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Q1) Maryanne is the senior chef for Bistro 501 Restaurant.Discuss whether the following losses are affected by the passive activity rules.
a.Maryanne has a $4,500 loss from her ownership interest in a catfish-farm limited partnership. Maryanne is a limited partner.
b.Maryanne has a $7,000 loss from her ownership interest in a feeder-lamb limited partnership. Maryanne is a general partner and is responsible for day-to-day management decisions.
c.Maryanne has a $11,000 loss from her ownership of a low-income housing project.
d.Maryanne owns a rental house across the street from North Forest College and actively participates in managing the rental property. The rental property generates a loss of $5,000 for the current year.
Q2) Fowler sells stock he had purchased for $22,000 to his brother,Phil,for $15,000.What is the tax consequence of the sale to Fowler and Phil? Explain the three possible tax consequences if Phil sells the stock two years later to his neighbor?
Q3) If a corporation incurs a net operating loss,what would cause it to elect to carry the loss forward and forsake the carryback? Explain.
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Chapter 8: Taxation of Individuals
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Sample Questions
Q1) Travel and lodging expense of $800 incurred by an employee on a business related trip (no reimbursement).Amount: $800
Q2) Baylen,whose adjusted gross income is $60,000,purchases a new home during the year,borrowing $300,000 from Century National Bank to finance the purchase.He also pays $3,000 in points and $4,500 in loan origination fees.During the year he pays interest of $14,000 on the loan.What is Baylen's allowable interest deduction?
A)$14,000
B)$15,800
C)$17,000
D)$18,800
E)$23,300
Q3) Eileen pays $14,000 of interest related to her purchase of investments.During the current year,Eileen's adjusted gross income is $80,000,which includes investment related income of $19,000.Her other investment expenses are $9,000.Determine whether the interest is deductible,how it would be deducted on the taxpayer's return (if there are alternatives possible,discuss the conditions which would determine the treatment)and any limitations that might be placed on the deduction.
Q4) Explain the support test and the gross income test to be a qualifying relative. To view all questions and flashcards with answers, click on the resource link above. Page 10
Chapter 9: Acquisitions of Property
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Q1) If the executor of a decedent's estate elects the alternate valuation date and none of the estate's property is sold or distributed before the alternate date,the estate's assets are valued as of how many months after the date of death?
A)0, date of death is the correct valuation date.
B)3 months.
C)6 months.
D)9 months.
E)12 months.
Q2) Kim owns a truck that cost $35,000 several years ago.After using it personally for two years,she converts the truck to business use when the truck's fair market value is $20,000.She uses the truck in her business and appropriately deducts $5,000 in depreciation.Then,she sells the truck for $42,000.What is Kim's recognized gain or loss on the sale?
A)No gain or loss
B)$12,000 gain
C)$27,000 gain
D)$32,000 gain
E)$ 7,000 gain
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Chapter 10: Cost Recovery on Property: Depreciation, depletion,
and Amortization
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Q1) What is the MACRS recovery period for an office desk?
A)3 years.
B)5 years.
C)6 years.
D)7 years.
E)10 years.
Q2) To compute cost depletion,you must know the basis subject to depletion,the recoverable quantity of the natural resource,and the quantity of the natural resource sold during the year.
A)True
B)False
Q3) MACRS applies to new and used depreciable personal property used for the production of income.
A)True
B)False
Q4) Discuss why listed property gets special attention.
Q5) Contrast the facts and circumstances depreciation approach commonly used before 1981 with Modified Accelerated Cost Recovery (MACRS).
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Chapter 11: Property Dispositions
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Q1) Hurst Company purchased a commercial building in 2001 for $700,000.The building is sold in 2016 for $900,000.The actual depreciation deducted on the building as of the sale date was $600,000.Straight-line depreciation for the same period would have been $400,000.What is the amount and character of the gain recognized on the sale?
A)$900,000 Section 1231 gain.
B)$200,000 ordinary income, and $100,000 Section 1231 gain.
C)$400,000 ordinary income, and $400,000 Section 1231 gain.
D)$200,000 ordinary income, and $400,000 long-term capital gain.
E)$200,000 ordinary income, and $600,000 Section 1231 gain.
Q2) George's wife sells stock she purchased 10 months ago at a gain of $212.
Q3) In July 2016,Hillary sells a stamp from her stamp collection at a gain of $500.Hillary purchased the stamp in 2010.If Hillary is in the 25% marginal tax rate bracket and has no other capital asset sales in 2016,what is her tax on the sale of the stamp?
A)$- 0 -
B)$25
C)$50
D)$75
E)$125
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Chapter 12: Non-Recognition Transactions
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Q1) Roscoe receives real estate appraised at $200,000 and cash of $10,000 from Cathy in exchange for Roscoe's investment realty with a basis of $170,000.What is his basis in the new real estate?
A)$160,000
B)$170,000
C)$180,000
D)$200,000
E)$210,000
Q2) Drake and Cynthia sell their home for $475,000,incurring selling expenses of $20,000.They had purchased the residence in 1998 for $105,000 and made capital improvements totaling $25,000.They buy a new residence for $210,000.What is their realized gain and recognized gain on the sale? What is their basis in the new house?
Q3) Inventory for office supplies.
A)qualifies as a like-kind exchange
B)does not qualify as a like-kind exchange
Q4) Land in London,England for land in San Francisco,California.
A)qualifies as a like-kind exchange
B)does not qualify as a like-kind exchange
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Chapter 13: Choice of Business Entity-General Tax and
Nontax
Factorsformation
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Q1) Corporations generally are required to use the accrual method of accounting.
A)True
B)False
Q2) Nigel and Frank form NFS,Inc.an electing S corporation,by combining the assets of their respective businesses.Nigel contributes $10,000 and assets worth $90,000 (adjusted basis of $60,000)for a 1/3 interest.Frank contributes $90,000 and assets worth $270,000 (adjusted basis of $150,000)for a 2/3 interest.NFS also assumes $60,000 of debt on Frank's assets.What is Frank's basis in his stock?
A)$180,000
B)$220,000
C)$240,000
D)$300,000
E)$360,000
Q3) Does the selection of a corporate entity ever make sense based on a desire for lower marginal tax rates? Discuss.
Q4) Discuss what limited liability means.What type of entity (or entities)offers this characteristic to its owners? What type(s)of entity (or entities)do not provide this characteristic?
Q5) Discuss the characteristics of a personal service corporation (PSC).
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Chapter 14: Choice of Business Entity-Operations and Distributions
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Q1) Higlo Paints is a partnership that reports an operating income of $50,000 in the current year.Higlo also has a $20,000 Section 1231 gain from the sale of a building and $10,000 in nondeductible expenses.Bernice owns 20% of Higlo and withdraws $5,000 from the partnership during the current year.Bernice's basis will increase by:
A)$5,000
B)$7,000
C)$9,000
D)$10,000
E)$12,000
Q2) Virginia is the sole shareholder in Barnes Inc.,an electing S corporation.During the current year,Barnes has operating income of $64,000,interest income of $10,000 from investments,and passive losses from investments in limited partnerships of $20,000.Barnes Corporation pays $12,000 in dividends.What is Virginia's taxable income from Barnes for the current year?
A)$12,000
B)$46,000
C)$54,000
D)$74,000
E)$76,000
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Chapter 15: Choice of Business Entity-Other Considerations
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Q1) A company that maintains a SIMPLE-401(k)has the option of funding the plan by
I.Contributing 2% of an employee's salary up to a maximum of $5,300.
II.Match the employee's contribution up to a maximum of 3 percent of the employee's compensation with a maximum contribution of $12,000.
A)Only I is correct.
B)Only II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) On May 21,2014,Becker Corporation granted Howard an option to acquire 200 shares of the company's stock for $8 per share.The fair market price of the stock on the date of grant was $14.The option did not have a readily ascertainable fair market value.Howard exercises the option on July 7,2016,when the fair market value of the stock is $20.How much must she report as income at the date of exercise?
A)$-0-
B)$1,200
C)$2,400
D)$7,200
E)$10,800
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Chapter 16: Tax Research
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Q1) After major legislation is enacted,a general explanation of the law or "blue book" may be issued by which of the following:
A)House Ways and Means Committee.
B)Joint Committee on Taxation.
C)Treasury Department
D)Senate Finance Committee.
Q2) Taxpayers may elect to use the small claims division of the U.S.Tax Court if the amount of tax in dispute is less than
A)$1,000
B)$2,500
C)$5,000
D)$10,000
E)$50,000
Q3) A nonacquiescence
A)is issued when the IRS wins a court case.
B)is issued by the Joint Committee on Taxation.
C)means that the IRS disagrees with a decision of the court.
D)means that the IRS will follow the decision in similar situations.
Q4) Describe the steps of the tax research process.
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