Income Tax Law Exam Preparation Guide
Course Introduction
Income Tax Law offers a comprehensive exploration of the statutes, regulations, and judicial decisions that govern the assessment and collection of income taxes for individuals, businesses, and other entities. The course examines the foundational principles underlying the tax system, including the determination of taxable income, permissible deductions and credits, the treatment of various types of income, and the responsibilities of taxpayers and authorities. Students will analyze topics such as tax compliance, tax planning strategies, reporting requirements, and the ethical considerations in tax practice. Through case studies and real-world scenarios, the course aims to develop the analytical and practical skills needed to navigate the complexities of income tax law in both domestic and international contexts.
Recommended Textbook
South Western Federal Taxation 2015 Individual Income Taxes 38th Edition by William H. Hoffman
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Page 2
Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Sample Questions
Q1) In 2012,Deborah became 65 years old.In 2013 she added a swimming pool,and in 2014 she converted the residence to rental property and moved into an assisted living facility.Since 2011,Deborah's ad valorem property taxes have decreased once and increased twice.Explain.
Answer: The decrease probably came in 2012 when Deborah reached age 65.The increases probably occurred in 2013 when she added the pool and in 2014 when the residence was converted to rental property.
Q2) The annual exclusion,currently $14,000,is available for gift and estate tax purposes. A)True
B)False
Answer: False
Q3) A tax cut enacted by Congress that contains a sunset provision will make the tax cut temporary.
A)True
B)False
Answer: True
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Chapter 2: Working With the Tax Law
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Sample Questions
Q1) The IRS will not acquiesce to the following tax decisions:
A)U.S.District Court.
B)U.S.Tax Court.
C)U.S.Court of Federal Claims.
D)Small Case Division of the U.S.Tax Court.
E)All of these.
Answer: D
Q2) In recent years,Congress has been relatively successful in simplifying the Internal Revenue Code.
A)True
B)False
Answer: False
Q3) A taxpayer should always minimize his or her tax liability.
A)True
B)False
Answer: False
Q4) Regulations are generally issued immediately after a statute is enacted.
A)True
B)False
Answer: False
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Chapter 3: Tax Formula and Tax Determination;an
Overview of Property Transactions
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Sample Questions
Q1) A granddaughter,who lives with taxpayer,is 19 years old,earns $5,000,and is not a full-time student.
A)Could be a qualifying child.
B)Could be a qualifying relative.
C)Could be either a qualifying child or a qualifying relative.
D)Could be neither a qualifying child nor a qualifying relative.
Answer: D
Q2) As opposed to itemizing deductions from AGI,the majority of individual taxpayers choose the standard deduction.
A)True
B)False Answer: True
Q3) Since an abandoned spouse is treated as not married and has one or more dependent children,he or she qualifies for the standard deduction available to head of household.
A)True
B)False Answer: True
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Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) 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.
Q2) Thelma and Mitch were divorced.The couple had a joint brokerage account that included stocks with a basis of $600,000 and a fair market value of $1,000,000.Under the terms of the divorce agreement,Mitch would receive the stocks and Mitch would pay Thelma $100,000 each year for 6 years,or until Thelma's death,whichever should occur first.Thelma and Mitch lived apart when the payments were made by Mitch.Mitch paid the $600,000 to Thelma over the sixyear period.The divorce agreement did not contain the word "alimony." Then,Mitch sold the stocks for $1,300,000.Mitch's recognized gain from the sale is:
A)$0.
B)$1,000,000 ($1,300,000 - $300,000).
C)$700,000 ($1,300,000 - $600,000).
D)$300,000 ($1,300,000 - $1,000,000).
E)None of these.
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Chapter 5: Gross Income: Exclusions
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Q1) The CEO of Cirtronics Inc. ,discovered that the company's competitor had adopted a cafeteria plan for its employees.The CEO is concerned about retaining his talented employees and would like you to provide a brief explanation as to why a cafeteria plan may be attractive to the company's employees.
Q2) Swan Finance Company,an accrual method taxpayer,requires all of its customers to carry credit life insurance.If a customer dies,the company receives from the insurance company the balance due on the customer's loan.Ali,a customer,died owing Swan $1,500.The balance due included $200 accrued interest that Swan has included in income.When Swan collects $1,500 from the insurance company,Swan:
A)Must recognize $1,500 income from the life insurance proceeds.
B)Must recognize $1,300 income from the life insurance proceeds.
C)Does not recognize income because life insurance proceeds are tax-exempt.
D)Does not recognize income from the life insurance because the entire amount is a recovery of capital.
E)None of these.
Q3) What Federal income tax benefits are provided for college students?
Q4) 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) All domestic bribes (i.e. ,to a U.S.official)are disallowed as deductions.
A)True
B)False
Q2) The cost of legal advice associated with the preparation of an individual's Federal income tax return is not deductible because it is a personal expense.
A)True
B)False
Q3) Mitch is in the 28% tax bracket.He may receive a different tax benefit for a $2,000 expenditure that is classified as a deduction from AGI than he will receive for a $1,000 expenditure that is classified as a deduction for AGI.
A)True
B)False
Q4) Martha rents part of her personal residence in the summer for 3 weeks for $3,000.Anne rents all of her personal residence for one week in December for $2,500.Anne is not required to include the $2,500 in her gross income whereas Martha is required to include the $3,000 in her gross income.
A)True
B)False
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Page 8
Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) If a taxpayer sells their § 1244 stock at a loss,all of the loss will be ordinary loss.
A)True
B)False
Q2) Ivory,Inc. ,has taxable income of $600,000 and qualified production activities income (QPAI)of $700,000 in 2014.Ivory's domestic production activities deduction is:
A)$36,000.
B)$42,000.
C)$54,000.
D)$63,000.
E)None of these.
Q3) The amount of a loss on insured personal use property is reduced by the insurance coverage if no claim is made against the insurer.
A)True
B)False
Q4) "Other casualty" means casualties similar to those associated with fires,storms,or shipwrecks.
A)True
B)False
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) James purchased a new business asset (three-year personalty)on July 23,2013,at a cost of $40,000.James takes additional first-year depreciation Determine the cost recovery deduction for 2013.
A)$8,333
B)$26,666
C)$33,333
D)$41,665
E)None of these
Q2) Rustin bought used 7-year class property on May 15,2014,for $72,000.Rustin elects § 179 and straightline cost recovery.Rustin's taxable income would not create a limitation for purposes of the § 179 deduction.Determine the maximum write-off Rustin can take in 2014.
Q3) Discuss the effect on the cost recovery method of a taxpayer election if the uniform capitalization rules apply to a farming business.
Q4) Once the more-than-50% business usage test is passed for listed property,it does matter if the business usage for the property drops to 50% or less during the recovery period.
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) Qualifying job search expenses are deductible even if the taxpayer does not change jobs.
A)True
B)False
Q2) Sue has unreimbursed expenses.
A)Indicates employee status.
B)Indicates independent contractor status.
Q3) Distance test (for moving expenses)not satisfied
A)Cover charge paid to entertain client at a night club.
B)Deductible even if taxpayer does not take the new job
C)Company picnic sponsored by employer
D)Use of Federal per diem allowance to substantiate meals while in travel status
E)Does not have to be job related
F)Can include cost of car insurance and automobile club dues
G)Distribution from plan is taxable
H)Distribution from plan is not taxable
I)Expatriate (U.S.person who is employed overseas)returns home to retire
J)Taxpayer moves to a new residence 55 miles closer to his present job
K)Country club membership fee
L)Correct match not provided
Page 11
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) Jim's employer pays half of the premiums on a group medical insurance plan covering all employees,and employees pay the other half.Jim can exclude the half of the premium paid by his employer from his gross income and may include the half he pays in determining his medical expense deduction.
A)True
B)False
Q2) On December 31,2014,Lynette used her credit card to make a $500 contribution to the United Way,a qualified charitable organization.She will pay her credit card balance in January 2015.If Lynette itemizes,she can deduct the $500 in 2014.
A)True
B)False
Q3) A phaseout of certain itemized deductions applies for all taxpayers who choose to itemize their deductions.
A)True
B)False
Q4) Linda is planning to buy Vicki's home.They want to keep the transaction simple,so the sales agreement will not apportion the property taxes that Vicki has already paid on the home.Comment on the tax implications for Linda and Vicki.
Page 12
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Chapter 11: Investor Losses
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Sample Questions
Q1) Josh has investments in two passive activities.Activity A,acquired three years ago,produces income in the current year of $60,000.Activity B,acquired last year,produces a loss of $100,000 in the current year.At the beginning of this year,Josh's atrisk amounts in Activities A and B are $10,000 and $100,000,respectively.What is the amount of Josh's suspended passive loss with respect to these activities at the end of the current year?
A)$0
B)$36,000
C)$40,000
D)$100,000
E)None of these
Q2) Pablo,who is single,has $95,000 of salary,$10,000 of income from a limited partnership,and a $27,000 passive loss from a real estate rental activity in which he actively participates.His modified adjusted gross income is $95,000.Of the $27,000 loss,how much is deductible?
A)$0
B)$10,000
C)$25,000
D)$27,000
E)None of these
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Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) Darin's,who is age 30,has itemized deductions in calculating 2014 taxable income as follows: \(\begin{array}{lr}
\text { Medical expenses }[\$ 15,000-10 \%(\$ 100,000)] & \$ 5,000 \\
\text { Mortgage interest on personal residence } & 7,000 \\
\text { State income taxes } & 4,000 \\
\text { Real property taxes } & 4,500 \\
\text { Personal property taxes } & 2,500 \\
\text { Casualty loss }[\$ 14,000-(10 \% \times \$ 100,000)] & 4,000 \\
\text { Charitable contributions } & 3,500 \\
\text { Gambling losses }(\$ 3,200 \text { limited to gambling income of } \$ 1,000) & 1,000 \\
\text { Miscellaneous itemized deductions }[\$ 2.500-2 \%(\$ 100,000)] & 500\\\text { Itemized deductions }&\$32,000 \end{array}\)
a.Calculate Darin's itemized deductions for AMT purposes using the direct method.
b.Calculate Darin's itemized deductions for AMT purposes using the indirect method.
Q2) For the ACE adjustment,discuss the relationship between ACE and unadjusted AMTI.
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Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) Jermaine and Kesha are married,file a joint tax return,have AGI of $82,500,and have two children.Devona is beginning her freshman year at State University during Fall 2014,and Arethia is beginning her senior year at Northeast University during Fall 2014 after having completed her junior year during the spring of that year.Both Devona and Arethia are claimed as dependents on their parents' tax return.Devona's qualifying tuition expenses and fees total $4,000 for the fall semester,while Arethia's qualifying tuition expenses and fees total $6,200 for each semester during 2014.Full payment is made for the tuition and related expenses for both children during each semester.The American Opportunity credit available to Jermaine and Kesha for 2014 is:
A)$2,500.
B)$3,000.
C)$5,000.
D)$6,000.
E)None of these.
Q2) In computing the foreign tax credit,the greater of the foreign income taxes paid or the overall limitation is allowed.
A)True
B)False
Q3) 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) If insurance proceeds are received for property used in a trade or business,a casualty transaction can result in recognized gain,but cannot result in a recognized loss.
A)True
B)False
Q2) The amount of the loss basis of a gift will differ from the amount of the gain basis only if at the date of the gift the adjusted basis of the property exceeds the property's fair market value.
A)True
B)False
Q3) Andrew acquires 2,000 shares of Eagle Corporation stock for $100,000 on March 31, 2010. On January 1, 2014, he sells 125 shares for $5,000. On January 22, 2014, he purchases 135 shares of Eagle Corporation stock for $6,075. When does Andrews holding period begin for the 135 shares?
A) January 22, 2014.
B) January 1, 2014.
C) March 31, 2010.
D) March 31, 2010, for 125 shares and January 22, 2014, for 10 shares.
E) None of these.
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Sample Questions
Q1) Bud exchanges a business use machine with an adjusted basis of $22,000 and a fair market value of $30,000 for another business use machine with a fair market value of $28,000 and $2,000 cash.What is Bud's recognized gain or loss?
A)$0
B)$2,000
C)$6,000
D)$8,000
E)None of these
Q2) If the recognized gain on an involuntary conversion equals the realized gain because of a reinvestment deficiency,the basis of the replacement property will be more than its cost (cost plus realized gain).
A)True
B)False
Q3) Ramon sells land with an adjusted basis of $120,000 and a fair market value of $175,000 to Pauline,his wife,for $175,000.Discuss how the tax consequences would differ if Ramon and Pauline had never been married.
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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Q1) 54. Martha has both long-term and short-term 2013 capital gains and losses. The result of netting these gains and losses is a net longterm capital loss. Martha has no qualified dividend income. Also, Marthas 2013 taxable income puts her in the 28% tax bracket. Which of the following is correct?
A) Martha will use Parts I, II, and III of 2013 Form 1040 Schedule D.
B) Martha will not benefit from the special treatment for long-term capital gains.
C) Martha will have a capital loss deduction.
D) All of these.
E) None of these.
Q2) Which of the following events causes the purchaser of an option to add the cost of the option to the basis of the property to which the option relates?
A)The option is exercised.
B)The option is sold.
C)The option lapses.
D)The option is rescinded.
E)None of these.
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Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Q1) A business machine purchased April 10,2013,for $62,000 was fully depreciated in 2013 using § 179 immediate expensing.On August 15,2014,the sole proprietor who owned the machine gave it to his son.On that date,the machine's fair market value was $57,000.The son did not use the machine in business or hold it as inventory and the machine was sold on November 22,2014,for $53,000.What is the amount and nature of the gain or loss from disposition of the machine? Where is it reported in the son's tax return?
Q2) Verway,Inc. ,has a 2014 net § 1231 gain of $55,000 and had a $62,000 net § 1231 loss in 2013.For 2014,Verway's net § 1231 gain is treated as:
A)$55,000 ordinary loss.
B)$55,000 ordinary gain.
C)$55,000 capital loss.
D)$55,000 capital gain.
E)None of these.
Q3) Section 1231 property generally does not include artistic compositions.
A)True
B)False
Q4) Describe the circumstances in which the potential § 1245 depreciation recapture is extinguished.
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Chapter 18: Accounting Periods and Methods
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Q1) Generally,an advantage to using the cash method of accounting,as compared to the accrual method,is that under the cash method income is not recognized until it is collected,rather than being taxed as soon as the taxpayer has the right to collect the income.
A)True
B)False
Q2) Walter sold land (a capital asset)to an unrelated party for $100,000 cash and a 4% note for $150,000 due in three years.His basis in the land was $40,000.Walter and the purchaser are cash basis taxpayers.Which of the following statements is correct?
A)If the Federal rate is 3%,interest will be imputed at that rate.
B)If the Federal rate is 5%,interest will be imputed at that rate and the capital gain will be reduced.
C)If the Federal rate is 4.5%,interest will be imputed at that rate and the capital gain will be increased.
D)All of these.
E)None of these.
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Chapter 19: Deferred Compensation
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Q1) Larry negotiates a $2.5 million contract with Red,Inc. ,a publicly-held corporation that receives TARP funds,to become their CEO for 2014.What amount is deductible by Red,Inc. ,in 2014?
A)$0
B)$1,000,000
C)$2,064,000
D)$2,500,000
E)None of these
Q2) Any pretax amount elected by an employee as a plan contribution to a § 401(k)plan that does not exceed the statutory limit is not includible in gross income in the year of deferral and is 100% vested.
A)True
B)False
Q3) A NQDC plan cannot discriminate in favor of officers or other highly compensated employees.
A)True
B)False
Q4) A defined contribution plan is exempt from funding requirements.
A)True
B)False
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Chapter 20: Corporations and Partnerships
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Q1) Cerulean Corporation owns 6% of the stock in Auburn Corporation.During the year,Auburn received cash dividends of $800,000 from this investment.Determine Auburn Corporation's dividends received deduction based on the following assumptions:
a.Taxable income before the deduction is $960,000.
b.Taxable income before the deduction is $720,000.
c.Taxable income before the deduction is $480,000.
Q2) Gray is a calendar year taxpayer.In early December 2014,Gray's Board of Directors authorizes a pledge of an $80,000 donation to the Red Cross to help provide food and shelter to victims of natural disasters.The donation is paid as follows: $10,000 in late December 2014,$40,000 in February 2015,and $30,000 in early April 2015.Disregarding percentage limitations,the maximum deduction for 2014 is:
A)$80,000 if Gray is an accrual basis individual.
B)$50,000 if Gray is an accrual basis corporation.
C)$50,000 if Gray is a cash basis corporation.
D)$50,000 if Gray is an accrual basis individual.
E)None of these.
Q3) The domestic production activities deduction (DPAD)is handled differently for a partnership than for a C corporation.Explain
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