Income Tax Law Review Questions
Course Introduction
This course provides a comprehensive overview of the principles and application of income tax law, focusing on the legal framework governing the taxation of individuals, businesses, and other entities. Topics include the determination of taxable income, allowable deductions, exemptions, tax rates, tax credits, and procedural aspects of assessment and appeals. The course also examines the underlying policy objectives of income taxation, the interpretation of statutory provisions, compliance requirements, and the ethical considerations faced by taxpayers and professionals. Through a combination of case studies and statutory analysis, students will develop the skills necessary to understand and apply income tax law in a variety of practical contexts.
Recommended Textbook
South Western Federal Taxation 2015 Individual Income Taxes 38th Edition by William H. Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Sample Questions
Q1) Contributions to charitable organizations are deductible.
A)Economic considerations
B)Social considerations
C)Equity considerations
Answer: B
Q2) Rick,the sole proprietor of an adult entertainment club,is audited by the IRS.On the third day of the field audit,the regular IRS agent is accompanied by a special agent.Should Rick be concerned by this new development? Explain.
Answer: Yes,he should.Special agents rarely appear during an audit unless the regular agent suspects that fraud may be involved.Considering the type of business Rick conducts,the heavy use of cash probably exists.With cash involved,tax evasion is easier to carry out.
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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Q1) How do treaties fit within tax sources?
Answer: The U.S signs certain tax treaties (sometimes called tax conventions)with foreign countries to render mutual assistance in tax enforcement and to avoid double taxation.Tax legislation enacted in 1988 provided that neither a tax law nor a tax treaty takes general precedence.Thus,when there is a direct conflict with the Code and a treaty,the most recent item will take precedence.A taxpayer must disclose on the tax return any position where a treaty overrides a tax law.There is a $1,000 penalty per failure to disclose for individuals and a $10,000 per failure penalty for corporations.
Q2) Arizona is in the jurisdiction of the Eighth Circuit Court of Appeals.
A)True
B)False
Answer: False
Q3) Which publisher offers the United States Tax Reporter?
A)Research Institute of America
B)Commerce Clearing House
C)LexisNexis
D)Tax Analysts
E)None of these
Answer: A
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Chapter 3: Tax Formula and Tax Determination;an
Overview of Property Transactions
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Sample Questions
Q1) Evan and Eileen Carter are husband and wife and file a joint return for 2014.Both are under 65 years of age.They provide more than half of the support of their daughter,Pamela (age 25),who is a full-time medical student.Pamela receives a $5,000 scholarship covering her tuition at college.They furnish all of the support of Belinda (Evan's grandmother),who is age 80 and lives in a nursing home.They also support Peggy (age 66),who is a friend of the family and lives with them.How many dependency exemptions may the Carters claim?
A)Two
B)Three
C)Four
D)Five
E)None of these
Answer: B
Q2) In 2014,Frank sold his personal use automobile for a loss of $9,000.He also sold a personal coin collection for a gain of $10,000.As a result of these sales,$10,000 is subject to income tax.
A)True
B)False
Answer: True
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Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) Ted and Alice were in the process of negotiating a divorce agreement.They own bonds with a basis of $800,000 and a fair market value of $800,000.They also own common stock with a basis of $600,000 and a fair market value of $800,000.Alice is trying to decide whether to bargain to receive the bonds or the stock.She has no plans for selling the bonds or stock,whichever she receives.
a.Which would you advise Alice to receive?
b.From Ted's perspective,are the assets of equal value?
Q2) In the case of a below-market gift loan for which there is no exception to the imputed interest rules,the lender is deemed to have received interest income even though no interest is charged and collected.
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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Q1) If an employer pays for the employee's longterm care insurance premiums,the employee can exclude from gross income the premiums but all of the benefits collected must be included in gross income.
A)True
B)False
Q2) For a person who is in the 35% marginal tax bracket,$1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax.
A)True
B)False
Q3) Carmen had worked for Sparrow Corporation for thirty years when she died of a heart attack at age 60.She was practically penniless at the time of her death,owed a $12,000 hospital bill,and had a disabled spouse.The company was very concerned about its public image,and rather than run the risk of embarrassment from one of its long-term employees dying and leaving her spouse with insufficient means,the Board of Directors agreed to pay Carmen's hospital bill and to give her spouse $6,000 per year for the rest of his life.Discuss both sides of the question whether Carmen (or her estate)and her spouse realize any taxable income from the above.
Q4) 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) 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
Q2) For a vacation home to be classified in the personal/rental use category,what attributes must be present?
Q3) The legal cost of having a will prepared is not deductible. A)True
B)False
Q4) Expenses incurred for the production or collection of income generally are deductions from adjusted gross income.
A)True
B)False
Q5) Walt wants to give his daughter $1,800 for Christmas.As an alternative,she suggests that he pay the property taxes on her residence.If Ralph pays the property taxes,he can deduct them.
A)True
B)False
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) A taxpayer who sustains a casualty loss in an area designated by the President of the United States as a disaster area may take the loss in the year in which the loss occurred or elect to take the loss in the previous year.Identify factors that should be considered in deciding in which year to take the loss.
Q2) The limit for the domestic production activities deduction (DPAD)uses all W-2 wages paid to employees by the taxpayer during the tax year.
A)True
B)False
Q3) If personal casualty gains exceed personal casualty losses (after deducting the $100 floor),there is no itemized deduction.
A)True
B)False
Q4) A taxpayer can carry any NOL incurred forward up to 20 years.
A)True
B)False
Q5) Discuss the treatment,including the carryback and carryforward periods,of casualty losses incurred with personal use property.
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Q6) Why was the domestic production activities deduction (DPAD)enacted by Congress?
Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Q1) If a new car that is used predominantly in business is placed in service in 2014,the statutory dollar cost recovery limit under § 280F will depend on whether the taxpayer takes MACRS or straightline depreciation.
A)True
B)False
Q2) Land improvements are generally not eligible for cost recovery.
A)True
B)False
Q3) The statutory dollar cost recovery limits under § 280F for passenger automobiles are changed if midquarter cost recovery is used.
A)True
B)False
Q4) If startup expenses total $53,000 in 2014,$51,000 is amortized over 180 months. A)True
B)False
Q5) A purchased trademark is a § 197 intangible.
A)True
B)False
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Q6) Discuss the reason for the inclusion amount with respect to leased automobiles.
Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) A taxpayer who claims the standard deduction will not avoid the 2% floor on unreimbursed employee expenses.
A)True
B)False
Q2) On their birthdays,Lily sends gift certificates (each valued at $25)to Caden (a key client)and to each of Caden's two minor children.Lily can deduct only $25 as to these gifts.
A)True
B)False
Q3) Sue does not work for other parties.
A)Indicates employee status.
B)Indicates independent contractor status.
Q4) A taxpayer who uses the automatic mileage method for the business use of an automobile can change to the actual cost method in a later year.
A)True
B)False
Q5) Travel status requires that the taxpayer be away from home overnight.
a.What does "away from home overnight" mean?
b.What tax advantages result from being in travel status?
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) In 2014,Brandon,age 72,paid $3,000 for long-term care insurance premiums.He may include the $3,000 in computing his medical expense deduction for the year.
A)True
B)False
Q2) During 2014,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) For the past several years,Jeanne and her two sisters have taken turns claiming a dependency exemption deduction for their mother under a multiple support agreement.This year Jeanne will be entitled to the exemption,and her mother needs money for surgery and new eyeglasses.Should Jeanne pay for the medical expenses as her share of her mother's expenses? How would this benefit Jeanne?
Q4) Linda borrowed $60,000 from her parents for a down payment on a condominium.She paid interest of $5,500 in 2012,$0 in 2013,and $9,000 in 2014.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) In the current year,Lucile,who has AGI of $70,000 before considering rental activities,is active in three separate real estate rental activities and is in the 28% tax bracket.She had $15,000 of losses from Activity A,$25,000 of losses from Activity B,and income of $20,000 from Activity C.She also had $3,100 of tax credits from Activity A.Calculate her deductions and credits currently allowed and the suspended losses and credits.
Q2) Orange Corporation,a closely held (non-personal service)C corporation,earns active income of $300,000 in the current year.The corporation also receives $35,000 in dividends and incurs a loss of $50,000 from an investment in a passive activity.What is Orange's income for the year after considering the passive investment?
Q3) Sarah purchased for $100,000 a 10% interest in a business venture that is not subject to the passive activity rules.During the first year,her share of the entity's loss was $120,000.At the beginning of the second year,the entity obtained $800,000 of recourse financing.During the second year,Sarah withdrew cash of $20,000,and her share of the entity's loss was $25,000.Calculate the amount of loss that Sarah may claim in each of the two years and determine her at-risk amount at the end of each year.
Q4) Describe the types of activities and taxpayers that are subject to the at-risk rules.
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Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) Andrea,who is single,has a personal exemption deduction in calculating her 2014 taxable income.She has no dependency deductions.What is the amount of the AMT adjustment in calculating AMTI?
Q2) The AMT exemption for a corporation with $225,000 of AMTI is $18,750.
A)True B)False
Q3) In the current tax year,Ben exercised an incentive stock option (ISO),acquiring stock with a fair market value of $190,000 for $170,000.His AMT basis for the stock is $170,000,his regular income tax basis for the stock is $170,000,and his AMT adjustment is $0 ($170,000 - $170,000).
A)True B)False
Q4) 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
Q5) What effect do deductible gambling losses for regular income tax purposes have in calculating AMTI?
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Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) For the current year,the base amount for the Social Security portion (old age,survivors,and disability insurance)is different from that for the Medicare portion of FICA.
A)True
B)False
Q2) During the year,Green Corporation (a U.S.corporation)has U.S.-source income of $750,000 and foreign income of $500,000.The foreign-source income generates foreign income taxes of $240,000.The U.S.income tax before the foreign tax credit is $425,000.Green Corporation's foreign tax credit is:
A)$170,000.
B)$240,000.
C)$425,000.
D)$500,000.
E)None of these.
Q3) Child and dependent care expenses include amounts paid for general household services.
A)True
B)False
Q4) Describe the withholding requirements applicable to employers.
Q5) 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) In 1973,Fran received a birthday gift of stock worth $75,000 from her aunt.The aunt had owned the stock (adjusted basis $50,000)for 10 years and paid gift tax of $27,000 on the transfer.Fran's basis in the stock is $75,000-the lesser of $77,000 ($50,000 + $27,000)or $75,000.
A)True
B)False
Q2) Reggie owns all the stock of Amethyst,Inc.(adjusted basis of $100,000).If he receives a distribution from Amethyst of $90,000 and corporate earnings and profits are $15,000,Reggie has a capital gain of $5,000 and an adjusted basis for his Amethyst stock of $0.
A)True
B)False
Q3) Define fair market value as it relates to property transactions.
Q4) If losses are disallowed in a related party transaction,the holding period for the buyer includes the holding period of the seller.
A)True
B)False
Q5) Define a bargain purchase of property and discuss the related tax consequences.
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Q6) For disallowed losses on related-party transactions,who has the right of offset?
Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) Chaney exchanges a truck used in her business for making deliveries for a smaller more fuel-efficient truck to be used in her business for making deliveries.The adjusted basis for her truck is $32,000.The smaller truck has a fair market value of $33,000.In addition,Chaney receives cash of $4,000.
a.Calculate Chaney's realized and recognized gain or loss.
b.Calculate Chaney's basis for the assets she received. a.\(\begin{array}{ll}
\text { Amount realized }(\$ 33,000+\$ 4,000) & \$ 37,000 \\
\text { Adjusted basis } & \underline{(32,000)} \\
\text { Realized gain } & \$ 5,000\\\text { Recognized gain }&\$4,000
\end{array}\) a.\(\begin{array}{ll}
\text { Amount realized }(\$ 33,000+\$ 4,000) & \$ 37,000 \\
\text { Adjusted basis } & \underline{(32,000)} \\
\text { Realized gain } & \$ 5,000\\\text { Recognized gain }&\$4,000 \end{array}\)
Q2) Section 1033 (nonrecognition of gain from an involuntary conversion)applies to both gains and losses.
A)True
B)False
Q3) Define an involuntary conversion.
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) 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.
Q2) Which of the following comparisons is correct?
A)Corporations may carryback capital losses;individuals may not.
B)Both corporation and individual long-term capital losses carryover as short-term capital losses.
C)Corporations may carryforward capital losses indefinitely;individuals may only carryforward capital losses for five years.
D)Both corporations and individuals may use an alternative tax rate on net capital gains. E)None of these.
Q3) If a capital asset is sold at a gain,the holding period is important.
A)True B)False
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Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Q1) An individual business taxpayer owns land on which he grows trees for logging.The land has been held more than 10 years and the trees growing on the land were planted eight years ago.Normally,the timber would be inventory for this taxpayer,but the tax law allows the taxpayer to elect to treat cutting the timber as the disposition of a § 1231 asset.
A)True
B)False
Q2) Spencer has an investment in two parcels of vacant land.Parcel 1 is a capital asset and parcel 2 is a § 1231 asset.Spencer already has shortterm capital loss for the year he would like to offset with capital gain.Spencer has § 1231 lookback loss that exceeds the gain from the disposition of either land parcel.Spencer only wants to sell one land parcel and each of them would yield the same amount of gain.The gain that would be recognized exceeds the short- term capital loss Spencer already has.Which of the statements below is correct?
A)Spencer will have a net capital loss no matter which land parcel he sells.
B)Spencer will have a net capital loss if he sells parcel 2.
C)Spencer will have a net capital loss if he sells parcel 1.
D)Spencer will have a net capital gain if he sells either parcel 1 or parcel 2.
E)None of these.
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Chapter 18: Accounting Periods and Methods
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Q1) Todd,a CPA,sold land for $300,000 cash on the date of sale plus a note for $500,000 due in one year.The interest rate on the note was equal to the Federal rate.The fair market value of the note was $400,000.Todd's basis in the land was $80,000.
A)If Todd uses the cash basis to report the income from his practice,he cannot use the installment method to report the gain on the sale of the land.
B)If Todd uses the accrual basis to report the income from his practice,he cannot use the installment method to report the gain from the sale of the land.
C)If Todd uses the installment method to report the gain,the contract price is $800,000.
D)If Todd does not use the installment method,his gain in the year of sale is $620,000 ($700,000 - $80,000).
E)None of these.
Q2) A C corporation provides lawn maintenance services to various businesses and homeowners.The corporation has average annual gross receipts of $3,500,000.The corporation may use the cash method of accounting.
A)True
B)False
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Chapter 19: Deferred Compensation
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Q1) Traditional IRA contributions made after an individual reaches the age of 65 are treated as excess contributions and are subject to a nondeductible 6% excise penalty tax.
A)True
B)False
Q2) A participant has an adjusted basis of $0 in any nondeductible contributions to a traditional IRA.
A)True
B)False
Q3) Under what circumstances is it advantageous for an employee to elect to be taxed immediately as ordinary income on the FMV in excess of the amount paid for restricted property?
Q4) A participant,who is age 38,in a cash or deferred arrangement plan [§ 401(k)] may contribute up to what amount in 2014?
A)$12,000
B)$16,500
C)$17,000
D)$17,500
E)None of these
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Chapter 20: Corporations and Partnerships
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Q1) How does the domestic production activities deduction differ for corporations than for individuals?
Q2) In the current year,Rose Corporation,a calendar year corporation,has taxable income from operations of $95,000 and a long-term capital gain of $10,000.
a.What is Rose Corporation's Federal income tax liability?
b.What if Rose Corporation is a personal service corporation?
Q3) A corporation's election to forego a net operating loss carryback is irrevocable and cannot later be changed.
A)True
B)False
Q4) Regarding the tax treatment of charitable contributions,corporations enjoy two major advantages over individuals.Elaborate.
Q5) For various reasons,Bill would like to incorporate his very successful business.Before doing so,however,he has the following reservations:
-Recognizing gain on appreciated business assets.
-Avoiding (or minimizing)any future corporate income tax.
-Retaining ownership of the building occupied by the business. Suggest a resolution of Bill's concerns.
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