Income Tax Procedure
Exam Practice Tests
Course Introduction
Income Tax Procedure is a comprehensive course designed to introduce students to the essential concepts and processes involved in the administration of income tax laws. The course covers key topics such as determining taxable income, understanding filing requirements for individuals and businesses, identifying various types of income and deductions, and applying relevant tax credits. Students will also learn the practical aspects of tax calculation, document preparation, and the electronic filing of tax returns. Emphasis is placed on compliance with legal requirements, the examination of recent changes in tax legislation, and an introduction to tax dispute resolution procedures. By completing this course, students gain the practical knowledge and skills necessary for effective tax planning and compliance in both personal and professional contexts.
Recommended Textbook
South Western Federal Taxation 2019 Comprehensive 42nd Edition by David M. Maloney
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28 Chapters
4038 Verified Questions
4038 Flashcards
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Page 2
Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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211 Verified Questions
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Sample Questions
Q1) Two months after the burglary of his personal residence, Eric is audited by the IRS. Among the items taken in the burglary was a shoe box containing approximately $50,000 in cash. Eric is the owner and operator of a cash-and- carry liquor store. Eric wonders why he was audited. Can you help explain?
Answer: Although Eric's audit by the IRS could be the result of sheer chance, this appears unlikely. Press coverage of the burglary, particularly if the items stolen were enumerated, could have put the IRS on notice. Why would anyone keep such a large amount of cash at his personal residence? Also, Eric is in a business where tax evasion is easily accomplished.
Q2) A fixture will be subject to the ad valorem tax on personalty rather than the ad valorem tax on realty.
A)True
B)False
Answer: False
Q3) The IRS is required to redetermine the interest rate on underpayments and overpayments once a year.
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) 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
Q2) Which items tell taxpayers the IRS's reaction to certain court decisions?
A) Notices
B) Revenue Procedures
C) Revenue Rulings
D) Actions on Decisions
E) Legislative Regulations
Answer: D
Q3) Post-1984 letter rulings may be substantial authority for purposes of the accuracy-related penalty in § 6662.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Computing the Tax
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Sample Questions
Q1) When the kiddie tax applies, the child need not file an income tax return because the child's income will be reported on the parents' return.
A)True
B)False
Answer: False
Q2) In determining whether the gross income test is met for determining dependency status, only the taxable portion of a scholarship is considered.
A)True
B)False
Answer: True
Q3) Under what circumstances, if any, may an ex-spouse be claimed as a dependent?
Answer: As an ex-spouse does not meet the relationship test, he or she must be a member of the taxpayer's household. The association cannot be in violation of local law and the year involved cannot be the year of the divorce.
Q4) $1,050
Answer: c
Q5) Resident of Canada or Mexico
Answer: b
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Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) In some foreign countries, the tax law specifically designates the types of income items that are includible in gross income. How does this approach compare with the U.S. Internal Revenue Code (§ 61)? What is a major advantage to the approach used in the U.S. tax law?
Q2) The effects of a below-market loan for $100,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are:
A) The corporation has imputed interest income and the employee is deemed to have received a gift.
B) The corporation has imputed interest income and dividends paid.
C) The employee has no income unless the funds are invested and produce investment income for the year.
D) The employee has imputed compensation income and the corporation has imputed interest income.
E) None of these.
Q3) How does the taxation of Social Security benefits differ from the taxation of an annuity purchased by the taxpayer?
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Chapter 5: Gross Income: Exclusions
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Sample Questions
Q1) Fresh Bakery often has unsold donuts at the end of the day. The bakery allows employees to take the leftovers home. The employees are not required to recognize gross income because the bakery does not incur any additional cost.
A)True
B)False
Q2) Assuming a taxpayer qualifies for the exclusion treatment, the interest income on educational savings bonds:
A) Is gross income to the person who purchased the bond in the year the interest is earned.
B) Is gross income to the student in the year the interest is earned.
C) Is included in the student's gross income in the year the savings bonds are sold or redeemed to pay educational expenses.
D) Is not included in anyone's gross income if the proceeds are used to pay college tuition.
E) None of these.
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) The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests.
A)True
B)False
Q2) If a vacation home is classified as primarily personal use, part of the maintenance and utility expenses can be allocated and deducted as a rental expense.
A)True
B)False
Q3) If a vacation home is a personal/rental residence, no maintenance and utility expenses can be claimed as a deduction.
A)True
B)False
Q4) In determining whether an activity should be classified as a business or as a hobby, the satisfaction of the presumption (i.e., profit in at least 3 out of 5 years) ensures treatment as a business.
A)True
B)False
Q5) Are all personal expenses disallowed as deductions in 2018?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) On June 2, 2017, Fred's TV Sales sold Mark a large HD TV, on account, for $12,000. Fred's TV Sales uses the accrual method. In 2018, when the balance on the account was $8,000, Mark filed for bankruptcy. Fred was notified that he could not expect to receive any of the amount owed to him. In 2019, final settlement was made and Fred received $1,000. How much bad debt loss can Fred deduct in 2019?
A) $0
B) $7,000
C) $8,000
D) $12,000
E) None of the above
Q2) The amount of loss for partial destruction of business property is the decline in fair market value of the business property.
A)True
B)False
Q3) A father cannot claim a loss on his daughter's rental use property.
A)True
B)False
Q4) Discuss the tax treatment of non-reimbursed losses of an employee in connection with a trade or business.
Page 9
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Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Sample Questions
Q1) Under MACRS, which one of the following is not considered in determining depreciation for tax purposes?
A) Cost of asset.
B) Property recovery class.
C) Half-year convention.
D) Salvage (or residual) value.
E) None of the above.
Q2) The § 179 deduction can exceed $1,000,000 in 2018 if the taxpayer had a § 179 amount which exceeded the taxable income limitation in the prior year.
A)True
B)False
Q3) Rod paid $1,950,000 for a new warehouse on April 14, 2018. He sold the warehouse on September 29, 2023.
Determine the cost recovery deduction for 2018 and 2023.
Q4) The amount of startup expenditures that can be deducted in the year incurred is the greater of the actual amount of such expenses or $5,000.
A)True
B)False
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) A deduction for parking and other traffic violations incurred during business use of the automobile is allowed under the actual cost method but not the automatic mileage method.
A)True
B)False
Q2) 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 these.
Q3) Sue does not file a Schedule SE with her Form 1040.
Q4) Sue has unreimbursed expenses.
Q5) Explain to a small business owner some advantages and disadvantages of a simplified employee pension plan (SEP).
Q6) For tax purposes, "travel" is a broader classification than "transportation."
A)True
B)False
Q7) The services are performed at Sue's premises. Page 11
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) Al contributed a painting to the Metropolitan Art Museum of St. Louis, Missouri. The painting, purchased six years ago, was worth $40,000 when donated, and Al's basis was $25,000. If this painting is immediately sold by the museum and the proceeds are placed in the general fund, Al's charitable contribution deduction is $25,000 (subject to percentage limitations).
A)True
B)False
Q2) Ronaldo contributed stock worth $12,000 to the Children's Protective Agency, a qualified charity. He acquired the stock 20 months ago for $7,000. He may deduct $7,000 as a charitable contribution deduction (subject to percentage limitations).
A)True
B)False
Q3) Maria traveled to Rochester, Minnesota, with her son, who had surgery at the Mayo Clinic. Her son stayed at the clinic for the duration of his treatment. She paid airfare of $300 and $50 per night for lodging. The cost of Maria's airfare and lodging cannot be included in determining her medical expense deduction.
A)True
B)False
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Chapter 11: Investor Losses
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Sample Questions
Q1) David earned investment income of $20,000, incurred investment interest expense of $12,000, and other investment expenses of $9,000 during the current year. David can deduct $12,000 of investment interest for this year.
A)True
B)False
Q2) In 2018, Emily invests $120,000 in a limited partnership that is not a passive activity. During 2018, her share of the partnership loss is $90,000. In 2019, her share of the partnership loss is $50,000. How much can Emily deduct in 2018 and 2019?
Q3) Identify how the passive activity loss rules broadly classify various types of income and losses. Provide examples of each category.
Q4) Sherri owns an interest in a business that is not a passive activity and in which she has $20,000 at risk. If the business incurs a loss from operations during the year and her share of the loss is $32,000, this loss will be fully deductible.
A)True
B)False
Q5) At-risk amount.
Q6) Active participation.
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Page 14
Chapter 12: Tax Credits and Payments
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Sample Questions
Q1) Kevin and Sue have two children, ages 8 and 14. They spend $6,200 per year on eligible employment related expenses for the care of their children after school. Kevin earned a salary of $20,000 and Sue earned a salary of $18,000. What is the amount of the credit for child and dependent care expenses?
A) $690
B) $713
C) $1,380
D) $1,426
Q2) An individual generally may claim a credit for adoption expenses in the year in which the expenses are paid.
A)True
B)False
Q3) The incremental research activities credit is 20% of the qualified research expenses that exceed the base amount.
A)True
B)False
Q4) Discuss the treatment of unused general business credits.
Q5) Explain the purpose of the disabled access credit and describe the general characteristics of its computation.
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Chapter 13: Property Transactions: Determination of Gain or
Loss, Basis Considerations, and Nontaxable Exchanges
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Sample Questions
Q1) If the alternate valuation date is elected by the executor in 2018, the total basis of inherited property will be more than what it would have been if the primary valuation date and amount had been used.
A)True
B)False
Q2) Abby sells real property for $300,000. The buyer pays $5,000 in property taxes that had accrued during the year while the property was still legally owned by Abby. In addition, Abby pays $15,000 in commissions and $3,000 in legal fees in connection with the sale. How much does Abby realize (the amount realized) from the sale of her property?
A) $277,000
B) $282,000
C) $287,000
D) $300,000
E) None of the above
Q3) The taxpayer must elect to have the exclusion of gain under § 121 (sale of principal residence) apply.
A)True
B)False
Page 16
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Chapter 14: Property Transactions: Capital Gains and
Losses, Section 1231, and Recapture Provisions
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Sample Questions
Q1) Jillian, a single taxpayer, has a net long-term capital gain for the year and it is all made up of 25% long-term capital gain. She has positive taxable income for the year. Which of the following is not a possible tax rate that could be applied in taxing this gain as part of her taxable income?
A) 0%.
B) 15%.
C) 20%.
D) 25%.
E) a. and c.
Q2) Virgil was leasing an apartment from Marple, Inc. Marple paid Virgil $1,000 to cancel his lease and move out so that Marple could demolish the building. As a result:
A) Virgil has a $1,000 capital gain.
B) Virgil has a $1,000 capital loss.
C) Marple has a $1,000 capital loss.
D) Marple has a $1,000 capital gain.
E) None of the above.
Q3) Describe the circumstances in which the potential § 1245 depreciation recapture is extinguished.
Q4) May an individual that has purchased a patent be a holder of that patent?
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Chapter 15: Taxing Business Income
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Sample Questions
Q1) The QBI deduction will reduce both the income tax and self-employment taxes owed by a self-employed individual.
A)True
B)False
Q2) Which of the following statements is incorrect about LLCs and the check-the-box Regulations?
A) If a limited liability company with more than one owner does not make an election, the entity is taxed as a corporation.
B) All 50 states have passed laws that allow LLCs.
C) An entity with more than one owner and formed as a corporation cannot elect to be taxed as a partnership.
D) If a limited liability company with one owner does not make an election, the entity is taxed as a sole ??????????????.
E) A limited liability company with one owner can elect to be taxed as a corporation.
Q3) Describe the limitations on the qualified business income deduction that apply to high income taxpayers.
Q4) What are some of the issues remaining unresolved with the QBI deduction?
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Chapter 16: Accounting Periods and Methods
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Sample Questions
Q1) Related-party installment sales include all of the following except the first seller's:
A) Brothers and sisters.
B) Controlled corporations.
C) Lineal descendants and ancestors.
D) Uncles and aunts.
E) All of the above would be considered related parties.
Q2) Laura Corporation changed its tax year-end from July 31st to December 31st in 2018. The income for the period August 1, 2018 through December 31, 2018 was $35,000. The corporate tax rate in the state where the corporation performs all of its business is 5% on the first $50,000 of income and 7% on income above $50,000. Laura's state tax for the short period is $2,033.
A)True
B)False
Q3) Which of the following statements regarding a 52-53 week tax year is correct?
A) The year-end must be the same day of the week in all years.
B) The year cannot contain more than 366 calendar days.
C) Every four years, there will be only 51 weeks.
D) The year cannot end on a Sunday.
E) None of the above.
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Page 19
Chapter 17: Corporations: Introduction and Operating Rules
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Q1) Patrick, an attorney, is the sole shareholder of Gander Corporation, a C corporation. Gander is a personal service corporation with a fiscal year ending November 30 (pursuant to a § 444 election). The corporation paid Patrick a salary of $180,000 during its fiscal year ending November 30, 2018. How much salary must Gander pay Patrick during the period December 1 through December 31, 2018, to permit the corporation to continue to use its fiscal year without negative tax effects?
A) $0
B) $30,000
C) $165,000
D) $180,000
E) None of the above
Q2) For purposes of the accumulated earnings tax, earnings can be accumulated for reasonable needs of the business.
List several examples of what is included and several examples of what is not included in the reasonable needs of the business.
Q3) How is the limitation on the deduction of business interest computed? Does it apply to all taxpayers? What happens to any business interest deduction disallowed by the limitation?
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Chapter 18: Corporations: Organization and Capital Structure
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Sample Questions
Q1) Earl and Mary form Crow Corporation. Earl transfers property, basis of $200,000 and value of $1,600,000, for 50 shares in Crow Corporation. Mary transfers property, basis of $80,000 and value of $1,480,000, and agrees to serve as manager of Crow for one year? in return Mary receives 50 shares of Crow. The value of Mary's services is $120,000. With respect to the transfers:
A) Mary will not recognize gain or income.
B) Earl will recognize a gain of $1,400,000.
C) Crow Corporation has a basis of $1,480,000 in the property it received from Mary.
D) Crow will have a business deduction of $120,000 for the value of the services Mary will render.
E) None of the above.
Q2) In order to encourage the development of an industrial park, a county donates land to Ecru Corporation. The donation results in gross income to Ecru.
A)True
B)False
Q3) If a corporation is thinly capitalized, all debt is reclassified as equity.
A)True
B)False
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Chapter 19: Corporations: Distributions Not in Complete
Liquidation
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Q1) All cash distributions received from a corporation with a positive balance in accumulated E & P at the beginning of the year will be taxed as dividend income.
A)True
B)False
Q2) Intangible drilling costs deducted currently.
Q3) If stock rights are taxable, the recipient has income to the extent of the fair market value of the rights.
A)True
B)False
Q4) Maria and Christopher each own 50% of Cockatoo Corporation, a calendar year taxpayer. Distributions fromCockatoo are: $750,000 to Maria on April 1 and $250,000 to Christopher on May 1. Cockatoo's current E & P is $300,000 and its accumulated E & P is $600,000. How much of the accumulated E & P is allocated to Christopher's distribution?
A) $0
B) $75,000
C) $150,000
D) $300,000
E) None of the above
Page 22
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) The stock of Lavender Corporation is held as follows: 80% by Jade Corporation (basis of $400,000) and 20% by Tiffany (basis of $100,000). Lavender Corporation is liquidated in December of the current year, pursuant to a plan adopted earlier in the year. Pursuant to the liquidation, Lavender Corporation distributed Asset A (basis of $600,000, fair market value of $900,000) to Jade, and Asset B (basis of $250,000, fair market value of $225,000) to Tiffany. No election is made under § 338. With respect to the liquidation of Lavender:
A) Lavender recognizes a loss of $25,000 on the distribution of Asset B.
B) Jade has a basis in Asset A of $900,000.
C) Tiffany has a basis in Asset B of $225,000.
D) Jade recognizes a gain of $500,000.
E) Lavender recognizes a gain of $300,000 on the distribution of Asset A.
Q2) The basis for the acquiring corporation in the target's assets is increased by any gain recognized by the target.
A)True
B)False
Q3) Discuss the role of letter rulings in corporate reorganizations.
Q4) Compare the sale of a corporation's assets with a sale of its stock from the perspective of the seller.
Page 23
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Chapter 21: Partnerships
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Q1) Laura is a real estate developer and owns property that is treated as inventory (not a capital asset) in her business. She contributes a parcel of this land (basis of $15,000) to a partnership, also to be held as inventory. The fair market value of the property is $12,000 at the contribution date. After three years, the partnership sells the land for $10,000. The partnership will recognize a $5,000 ordinary loss on sale of the property.
A)True
B)False
Q2) The partnership agreement might provide, for example, that the first $40,000 of ordinary income is allocated to Partner A. Allocating income in this manner is an example of a separately stated item. A)True
B)False
Q3) Profits interest
Q4) Schedule K-1
Q5) Precontribution gain
Q6) Schedules M-1
Q7) Business purpose
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Chapter 22: S Corporations
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Q1) Which corporation is eligible to make the S election?
A) Non-U.S. corporation.
B) One-person limited liability company.
C) Insurance company.
D) U.S. bank.
E) None of the above can select S status.
Q2) Which item has no effect on an S corporation's AAA?
A) Stock purchase by a shareholder.
B) Interest expense.
C) Cost of goods sold.
D) Capital loss.
E) All have an effect on AAA.
Q3) An S shareholder's stock basis does not include a ratable share of S corporation liabilities.
A)True
B)False
Q4) A per-day, per-share allocation of flow-through S corporation items must be used.
A)True
B)False
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Chapter 23: Exempt Entities
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Q1) Which of the following statements regarding exempt organization filing requirements is incorrect?
A) Churches are required to file Form 990 (Return of Organization Exempt from Income Tax) only if its annual gross receipts exceed $50,000.
B) The due date for Form 990 (Return of Organization Exempt from Income Tax) is the fifteenth day of the fifth month after the end of the taxable year, whereas for private foundations the due date for Form 990-PF (Return of Private Foundation) is the fifteenth day of the fourth month after the end of the tax year.
C) Exempt organizations whose annual gross receipts do not exceed $50,000 can file an e-Postcard.
D) Only a. and b. are incorrect. E) a., b., and c. are incorrect.
Q2) Ice, Inc., a § 501(c)(3) organization, has been leasing a building to Soft, Inc., a taxable entity, for 15 years. The lease terminates in the current tax year. Ice's adjusted basis for the building is $225,000. It sells the building to the Development Partnership, a taxable entity, for $440,000. Selling expenses are $26,400. Calculate the effect of the sale on Ice's UBTI.
Q3) § 501(c)(4) civic league
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Chapter 24: Multistate Corporate Taxation
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Q1) An LLC apportions and allocates its annual taxable income in the same manner used by any other business operating in the state.
A)True
B)False
Q2) Compost Corporation has finished its computation of Federal taxable income. In State Q, the derivation of state corporate taxable income starts with the Federal amount and makes a number of modifications. List at least five such modifications that Compost is likely to encounter. In this regard, follow the general UDITPA rules, and list both addition and subtraction modifications.
Q3) Hendricks Corporation sells widgets in two states. State A levies a 9% effective tax rate, and State B levies a 3% rate. A and B have adopted sales-factor-only apportionment formulas. To reduce overall multistate income tax liabilities, Hendricks should:
A) Move its home office from B to A.
B) Remove all stored inventory from A.
C) Establish a personal training center in A.
D) Convert to employee status the independent contractors that it uses to sell widgets in A.
Q4) Groceries purchased by an individual and taken home for meal preparation there.
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Chapter 25: Taxation of International Transactions
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Q1) The IRS can use § 482 reallocations to assure that transactions between related parties are properly reflected in a tax return.
A)True
B)False
Q2) U.S. income tax treaties typically:
A) Provide for taxation exclusively by the source country.
B) Provide for taxation exclusively by the country of residence.
C) Provide rules by which multinational taxpayers avoid double taxation.
D) Provide that the country with the highest tax rate will be allowed exclusive tax collection rights.
Q3) OutCo, a controlled foreign corporation in Meena (located outside the U.S.), earns $600,000 in net interest and dividend income from investments in the bonds and stock of unrelated companies. All of the dividend payors are located in Meena. OutCo's Subpart F income for the year is:
A) $0.
B) $0 only if OutCo is engaged in a trade or business in Meena.
C) $600,000.
D) $600,000 only if OutCo is engaged in a trade or business in Meena.
Q4) Bilateral agreement between two countries related to tax issues.
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Chapter 26: Tax Practice and Ethics
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Q1) Concerning the penalty for civil tax fraud:
A) The burden of proof is on the taxpayer to establish that no fraud was committed.
B) Fraudulent behavior is more than mere negligence on the part of the taxpayer.
C) The penalty is 100% of the underpayment.
D) Fraud is defined in Code §§ 6663(b) and (f).
Q2) If the taxpayer shows ________________ for an underpayment of tax, the failure to pay penalty can be reduced or eliminated.
Q3) An individual's amended tax return, computing a refund or amount due, generally uses Form____________________.
Q4) According to the IRS, the annual "Tax Gap" totals over________________ $ billion.
Q5) The ________________ , a presidential appointee, is the "IRS's attorney."
Q6) Quon filed his Federal income tax return on time, but he did not remit the full balance due. Compute Quon's failure to pay penalty in each of the following cases. The IRS has not yet issued a deficiency notice.
a. Three months late, $5,000 additional tax due.
b. Nine months late, $5,000 additional tax due.
c. Five years late, $5,000 additional tax due.
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Chapter 27: The Federal Gift and Estate Taxes
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141 Verified Questions
141 Flashcards
Source URL: https://quizplus.com/quiz/7734
Sample Questions
Q1) A timely issued disclaimer by an heir transfers the property to someone else without a Federal gift tax result.
A)True
B)False
Q2) For Federal estate and gift tax purposes, the exemption equivalent is the same thing as the exclusion amount.
A)True
B)False
Q3) In 2004, Katelyn inherited considerable property when her father died. When Katelyn dies in 2018, her estate may be able to claim a credit as to some of the estate taxes paid by her father's estate.
A)True
B)False
Q4) Homer purchases a U.S. savings bond listing title as: "Homer, payable to Bernice upon Homer's death." Bernice is Homer's sister. Homer dies four years later, and Bernice cashes in the bond and keeps the proceeds.
Q5) The Federal transfer tax system includes three separate taxes.
A)True
B)False
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Chapter 28: Income Taxation of Trusts and Estates
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161 Verified Questions
161 Flashcards
Source URL: https://quizplus.com/quiz/7735
Sample Questions
Q1) Which of the following is the annual maximum amount to be included as gross income by all of the income beneficiaries of the trust or estate?
A) Entity taxable income.
B) Entity adjusted gross income.
C) Distributable net income.
D) Fiduciary accounting income.
Q2) Your client Ming is a complex trust that operates exclusively in the U.S. Make a list of five or more tax planning opportunities that you might suggest to Ming.
Q3) Like a corporation, the fiduciary reports and pays its own Federal income tax liability. A)True B)False
Q4) Marcus has been determined to be a grantor trust by the IRS. Your partner explains that this probably happened because the donor of the trust assets retained excessive powers over the operation of the trust or the use of its assets and income. To what powers is your partner referring?
Q5) In computing the Federal taxable income of a trust, a modified ________________ approach is used.
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