Income Tax Law Exam Questions
Course Introduction
Income Tax Law provides an in-depth examination of the legal principles governing taxation of individual and business income. The course explores key concepts such as gross income, deductions, exemptions, credits, and tax rates under the relevant national statutes and administrative regulations. Students gain insights into the tax implications for different forms of income, the processes for assessment and collection, and the roles of both taxpayers and authorities. Practical application is emphasized through analysis of case law and problem-solving exercises, preparing students to understand, comply with, and critically evaluate income tax obligations and strategies.
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South Western Federal Taxation 2013 Individual Income Taxes 36th Edition by William H
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) The states that impose a general sales tax also have a use tax. A)True
B)False Answer: True
Q2) For omissions from gross income in excess of 25% of that reported,there is no statute of limitations on additional income tax assessments by the IRS.
A)True
B)False Answer: False
Q3) The value added tax (VAT)has had wide acceptance in the international community. A)True
B)False
Answer: True
Q4) The principal objective of the FUTA tax is to provide some measure of retirement security.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Working With the Tax Law
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Sample Questions
Q1) The IRS issues an acquiescence or nonacquiescence only for regular Tax Court decisions.
A)True
B)False
Answer: False
Q2) Which company does not publish citators for tax purposes?
A) McGraw-Hill.
B) Commerce Clearing House.
C) Research Institute of America.
D) Westlaw.
E) Shepard's.
Answer: A
Q3) Which is presently not a major tax service?
A) Standard Federal Tax Reporter.
B) Federal Taxes.
C) United States Tax Reporter.
D) Tax Management Portfolios.
E) All of the above are major tax services.
Answer: B
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Page 4
Chapter 3: Tax Formula and Tax Determination: an
Overview of Property Transactions
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Q1) Monique is a resident of the U.S.and a citizen of France.If she files a U.S.income tax return,Monique can claim the standard deduction.
A)True
B)False Answer: True
Q2) Surviving spouse filing status begins in the year in which the deceased spouse died. A)True
B)False Answer: False
Q3) In satisfying the support test and the gross income test for claiming a dependency exemption,a scholarship received by the person being claimed is handled the same way for each test.Do you agree or disagree with this statement? Why?
Answer: Disagree.For purposes of the support test,all of the scholarship is disregarded.For purposes of the gross income test,only the taxable part is considered (i.e.,the nontaxable part is disregarded).
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5
Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Mark is a cash basis taxpayer.He is a partner in the M&M partnership,and his share of the partnership's profits for 2012 is $90,000.Only $40,000 was distributed to him in January 2012,and this was his share of the 2011 partnership profits.None of the 2012 profits were distributed although Mark's share of the 2012 profits was $90,000.Mark's gross income from the partnership for 2012 is $40,000.
A)True
B)False
Q2) 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
Q3) Paula transfers stock to her former spouse,Fred.The transfer is pursuant to a divorce agreement.Paula's cost of the stock was $75,000 and its fair market value on the date of the transfer is $95,000.Fred later sells the stock for $100,000.Fred's recognized gain from the sale of the stock is $5,000.
A)True
B)False
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Chapter 5: Gross Income: Exclusions
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Sample Questions
Q1) Louise works in a foreign branch of her employer's business.She earned $5,000 per month throughout the relevant period.
A) If Louise worked in the foreign branch from May 1, 2011 until October 31, 2012, she may exclude $40,000 from gross income in 2011 and exclude $50,000 in 2012.
B) If Louise worked in the foreign branch from May 1, 2011 until October 31, 2012, she cannot exclude anything from gross income because she was not present in the country for 330 days in either year.
C) If Louise began work in the foreign country on May 1, 2011, she must work through November 30, 2012 in order to exclude $55,000 from gross income in 2012 but none in 2011.
D) Louise will not be allowed to exclude any foreign earned income because she made less than $95,100.
E) None of the above.
Q2) 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.)
Q3) What Federal income tax benefits are provided for college students?
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Page 7
Chapter 6: Deductions and Losses: in General
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Q1) Olive,Inc.,an accrual method taxpayer,is a corporation that is equally owned by Maurice and Alex,who are brothers.The corporation uses the accrual method of accounting and the shareholders use the cash method.To provide Olive with funds to acquire additional working capital,the shareholders each loan Olive $100,000 with a 6% interest rate.At the end of the tax year,there is unpaid accrued interest of $3,000 due to each shareholder.From a timing perspective,when should Olive deduct this $6,000 and when should Maurice and Alex include the $3,000 in gross income? Olive pays the $3,000 to each shareholder early next year.
Q2) Assuming an activity is deemed to be a hobby,discuss the order and limits in which expenses must be deducted.
Q3) Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business.
A)True
B)False
Q4) A salary that is classified as unreasonable by the IRS is disallowed as a deduction to the corporation.
A)True
B)False
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) A theft of investment property can create or increase a net operating loss for an individual.
A)True
B)False
Q2) Regarding research and experimental expenditures,which of the following are not qualified expenditures?
A) Costs of improving an existing pilot model.
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.
Q3) Last year,taxpayer had a $10,000 nonbusiness bad debt.Taxpayer also had an $8,000 short-term capital gain and taxable income of $35,000.If taxpayer collects the entire $10,000 during the current year,$8,000 needs to be included in gross income.
A)True
B)False
Q4) An unreimbursed employee business expense can create an NOL for an individual.
A)True
B)False
Page 9
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) The maximum cost recovery method for all personal property under MACRS is 150% declining balance.
A)True
B)False
Q2) In 2011,Gail had a § 179 deduction carryover of $25,000.In 2012,she elected § 179 for an asset acquired at a cost of $115,000.Gail's § 179 business income limitation for 2012 is $142,000.Determine Gail's § 179 deduction for 2012.
A) $25,000.
B) $115,000.
C) $130,000.
D) $140,000.
E) None of the above.
Q3) Audra acquires the following new five-year class property in 2012:
Audra elects § 179 for Asset C.Audra's taxable income from her business would not create a limitation for purposes of the § 179 deduction.Audra takes additional first-year depreciation.Determine her total cost recovery deduction (including the § 179 deduction)for the year.
Q4) Discuss the reason for the inclusion amount with respect to leased automobiles.
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) In the case of an office in the home deduction,the exclusive business use test does not apply when the home is used as a daycare center.
A)True
B)False
Q2) A moving expense deduction is allowed even if at the time of the move the taxpayer did not have a job at the new location.
A)True
B)False
Q3) Which of the following expenses,if any,qualify as deductible?
A) Contributions to a Coverdell Education Savings Account (CESA).
B) Contributions to a qualified tuition program (§ 529 plan).
C) Job hunting expense of FBI agent who applies for the job of city manager of Beaumont (TX).
D) Contribution to a traditional IRA.
E) None of the above.
Q4) During 2012,Eva used her car as follows: 12,000 miles (business),1,400 miles (commuting),and 4,000 miles (personal).In addition,she spent $440 for tolls (business)and $620 for parking (business).If Eva uses the automatic mileage method,what is the amount of her deduction?
Page 11
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) In 2012,Dena traveled 545 miles for specialized medical treatment that was not available in her hometown.She paid $80 for meals during the trip,$125 for a hotel room on Tuesday night,and $15 in parking fees.She did not keep records of other out-of-pocket costs for transportation.Dena can include $270 in computing her medical expenses. A)True
B)False
Q2) During 2012,Kathy,who is self-employed,paid $650 per month for an HSA contract that provides medical insurance coverage with a $3,000 deductible.The plan covers Kathy,her husband,and their three children.Of the $650 monthly fee,$300 was for the high-deductible policy,and $350 was deposited into an HSA.How much of the amount paid for the high-deductible policy can Kathy deduct as a deduction for AGI?
Q3) Linda borrowed $60,000 from her parents for a down payment on a condominium.She paid interest of $5,500 in 2010,$0 in 2011,and $9,000 in 2012.The IRS disallowed the deduction.Can you offer any explanation for the disallowance?
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Chapter 11: Investor Losses
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Sample Questions
Q1) Lucy dies owning a passive activity with an adjusted basis of $90,000.Its fair market value at that date is $145,000.Suspended losses relating to the property were $75,000.Which of the following statements is true?
A) The heir's adjusted basis is $145,000, and Lucy's final deduction is $20,000.
B) The heir's adjusted basis is $145,000, and Lucy's final deduction is $75,000.
C) The heir's adjusted basis is $90,000, and Lucy's final deduction is $75,000.
D) The heir's adjusted basis is $220,000, and Lucy has no final deduction.
E) None of the above.
Q2) Ken has a $40,000 loss from an investment in a partnership in which he does not materially participate.He paid $30,000 for his interest.How much of the loss is disallowed by the at-risk rules? How much is disallowed by the passive loss rules?
Q3) Describe the types of activities and taxpayers that are subject to the at-risk rules.
Q4) 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?
Q5) What special passive loss treatment is available to real estate activities?
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Chapter 12: Alternative Minimum Tax
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Q1) The deduction for personal and dependency exemptions is allowed for regular income tax purposes,but is disallowed for AMT purposes.This results in a positive AMT adjustment.
A)True
B)False
Q2) Tammy expensed mining exploration and development costs of $100,000 incurred in 2012.She will be required to make negative AMT adjustments for each of the next nine years and a positive AMT adjustment in the current tax year.
A)True
B)False
Q3) The net capital gain included in an individual taxpayer's AMT base is eligible for the alternative 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
Q4) Under what circumstances are corporations exempt from the AMT?
Q5) Ashlyn is subject to the AMT in 2012.She calculates her AMT base to be $200,000.What are the AMT rates that apply for Ashlyn?
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Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) Certain situations exist where the wage-bracket table method of determining income tax withholdings cannot be used.
A)True
B)False
Q2) The additional Medicare taxes assessed on high-income individuals carry differing tax rates depending on the tax base.
A)True
B)False
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) Child and dependent care expenses do not include amounts paid for general household services.
A)True
B)False
Q5) Describe the withholding requirements applicable to employers.
Q6) Discuss the treatment of unused general business credits.
Page 15
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Sample Questions
Q1) Paul sells property with an adjusted basis of $45,000 to his daughter Dean,for $38,000.Dean subsequently sells the property to her brother,Preston,for $38,000.Three years later,Preston sells the property to Hun,an unrelated party,for $50,000.What is Preston's recognized gain or loss on the sale of the property to Hun?
A) $0.
B) $5,000.
C) $12,000.
D) ($5,000).
E) None of the above.
Q2) The basis of personal use property converted to business use is:
A) Always the lower of its adjusted basis or fair market value on the date of conversion.
B) Always its adjusted basis on the date of conversion.
C) Always its fair market value on the date of conversion.
D) Always the higher of its adjusted basis or fair market value on the date of conversion.
E) None of the above.
Q3) For gifts made after 1976,when will part of the gift tax paid by the donor be added to the donee's basis?
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Page 16
Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) If boot is received in a § 1031 like-kind exchange,the recognized gain cannot exceed the realized gain.
A)True
B)False
Q2) Which of the following exchanges qualifies for nonrecognition treatment as a § 1031 like-kind exchange?
A) Airplane used in a business for 1,000 shares of Blue, Inc., stock.
B) Computer used in a business for wooden filing cabinets to be used in a business.
C) Female cow for a male cow.
D) Land in Spain for land in Florida.
E) None of the above.
Q3) The exchange of unimproved real property located in Topeka (KS)for improved real property located in Atlanta (GA)does not qualify as a like-kind exchange.
A)True
B)False
Q4) To be eligible to elect postponement of gain treatment for an involuntary conversion,what are the three tests for qualifying replacement property?
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) Mauve Company signs a 13-year franchise agreement with Mauve Too.Mauve Too retained significant powers,rights,and a continuing interest.Mauve Company (the franchisee)makes noncontingent payments of $16,000 per year for the first five years of the franchise.Mauve Company also pays a contingent fee of 1% of gross sales every month.Which of the following statements is correct?
A) Mauve Company may deduct the $16,000 per year noncontingent payments in full as they are made.
B) Mauve Company may deduct the monthly contingent fee as it is paid.
C) Mauve Company may deduct both the noncontingent annual fee and the contingent monthly fees as they are paid.
D) Mauve Company may not deduct either the noncontingent annual fee or the contingent monthly fees as they are paid.
E) None of the above.
Q2) 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
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Chapter 17: Property Transactions: Section 1231 and Recapture Provisions
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Q1) Casualty gains and losses from nonpersonal use assets are not netted against casualty gains and losses from personal use assets.
A)True
B)False
Q2) Which of the following is correct?
A) Improperly classifying a § 1231 loss as a capital loss might affect adjusted gross income.
B) Improperly classifying a capital loss as a § 1231 loss might affect adjusted gross income.
C) Misclassifying a § 1231 gain as a short-term capital gain might affect adjusted gross income.
D) Misclassifying a short-term capital gain as a § 1231 gain might affect adjusted gross income.
E) All of the above.
Q3) Depreciable personal property was sold at a gain in 2011.On what 2011 form would this transaction be reported,where initially in that form,and what will the form most likely do with the gain?
Q4) Describe the circumstances in which the potential § 1245 depreciation recapture is extinguished.
Page 19
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Chapter 18: Accounting Periods and Methods
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Q1) If a company uses the LIFO inventory method to report the cost of inventory and cost of goods sold on its financial statements,footnote disclosure of the income as calculated by the FIFO method does not violate the tax and financial accounting conformity requirement.
A)True
B)False
Q2) Juan,not a dealer in real property,sold land that he owned.His adjusted basis in the land was $500,000 and it was encumbered by a mortgage for $200,000.The terms of the sale required the buyer to pay Juan $100,000 on the date of the sale.The buyer assumed Juan's mortgage and gave Juan a note for $600,000 (plus interest at the Federal rate)due in the following year.What is the gross profit percentage (gain ¸ contract price)?
A) 300/900 = 33.3%.
B) 400/700 = 57.14%.
C) 400/600 = 66.67%.
D) 500/900 = 55.55%.
E) None of the above.
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Chapter 19: Deferred Compensation
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Q1) A defined benefit plan must reduce the $200,000 (in 2012)maximum benefits payable by one-tenth for each year of participation under 10 years that an employee has performed.
A)True
B)False
Q2) A participant,who is age 38,in a cash or deferred arrangement plan [§ 401(k)] may contribute up to what amount in 2012?
A) $12,000.
B) $16,500.
C) $17,000.
D) $17,500.
E) None of the above.
Q3) Samuel,age 53,has a traditional deductible IRA with an account balance of $112,000.Of this amount,$82,000 represents contributions and $30,000 represents earnings.In 2012,he converts his traditional IRA into a Roth IRA.What amount must Samuel include in his gross income,if any,in 2012?
Q4) Group term life insurance is considered to be a type of deferred compensation.
A)True
B)False
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Chapter 20: Corporations and Partnerships
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Q1) Why were the check-the-box Regulations issued?
Q2) An S corporation makes a $20,000 cash distribution to a shareholder whose basis in the stock is $19,000.The distribution will result in a $1,000 negative basis in the stock.
A)True
B)False
Q3) Changes in the liabilities (trade accounts payable,bank loans,etc.)of a partnership will affect the basis of a partnership interest.
A)True
B)False
Q4) In computing the taxable income (or loss)of an S corporation,a domestic production activities deduction (DPAD)is not allowed.
A)True
B)False
Q5) Like S corporations,partnerships serve as conduits for their owners.
A)True
B)False
Q6) The domestic production activities deduction (DPAD)is handled differently for a partnership than for a C corporation.Explain
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