Individual Income Taxation
Final Test Solutions
Course Introduction
Individual Income Taxation analyzes the principles, laws, and procedures governing federal income taxation of individuals in the United States. The course covers the determination of taxable income, exclusions, deductions, and credits; filing requirements and tax computation; the treatment of property transactions; and the ethical and legal responsibilities of taxpayers and tax preparers. Emphasis is placed on understanding the Internal Revenue Code, Treasury regulations, and relevant court decisions, as well as practical application through preparation of individual tax returns and critical examination of contemporary tax issues affecting individuals.
Recommended Textbook
South Western Federal Taxation 2018 Individual Income Taxes 41st Edition by William H. Hoffman
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20 Chapters
2583 Verified Questions
2583 Flashcards
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Page 2
Chapter 1: An Introduction to Taxation and Understanding
Federal Tax Law
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194 Verified Questions
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Sample Questions
Q1) Negligence penalty
Answer: c
Q2) 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.
Q3) Discriminant Index Function (DIF)
Answer: l
Q4) A state income tax can be imposed on nonresident taxpayers who earn income within the state on an itinerant basis.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Working With the Tax Law
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Sample Questions
Q1) Tax bills are handled by which committee in the U.S. House of Representatives?
A)Taxation Committee
B)Ways and Means Committee
C)Finance Committee
D)Budget Committee
E)None of these
Answer: B
Q2) 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 Internal Revenue 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.
Q3) The U.S. Tax Court meets most often in Washington, D.C.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Tax Formula and Tax Determination; an
Overview of Property Transactions
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Sample Questions
Q1) Which, if any, of the statements regarding the standard deduction is correct?
A)Some taxpayers may qualify for two types of standard deductions.
B)The standard deduction is not available to taxpayers who choose to deduct their personal and dependency exemptions.
C)The standard deduction may be taken as a for AGI deduction.
D)The basic standard deduction is indexed for inflation but the additional standard deduction is not.
E)None of these.
Answer: A
Q2) Kim, a resident of Oregon, supports his parents who are residents of Canada but citizens of Korea. Kim can claim his parents as dependents.
A)True
B)False
Answer: True
Q3) A cousin who does not live with taxpayer.
Answer: d
Q4) A daughter-in-law who lives with taxpayer.
Answer: b
Page 5
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Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) The Green Company, an accrual basis taxpayer, provides business-consulting services. Clients generally pay a retainer at the beginning of a 12-month period. This entitles the client to no more than 40 hours of services. Once the client has received 40 hours of services, Green charges $500 per hour. Green Company allocates the retainer to income based on the number of hours worked on the contract. At the end of the tax year, the company had $50,000 of unearned revenues from these contracts. The company also had $10,000 in unearned rent income received from excess office space leased to other companies. Based on the above, Green must include in gross income for the current year:
A)$60,000.
B)$50,000.
C)$10,000.
D)$0.
E)None of these.
Q2) George and Erin are divorced, and George is required to pay Erin $20,000 of alimony each year. George earns $75,000 a year. Erin is required to include the alimony payments in gross income although George earned the income.
A)True
B)False
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Chapter 5: Gross Income: Exclusions
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Sample Questions
Q1) Peggy is an executive for the Tan Furniture Manufacturing Company. Peggy purchased furniture from the company for $9,500, the price Tan ordinarily would charge a wholesaler for the same items. The retail price of the furniture was $12,500, and Tan's cost was $9,000. The company also paid for Peggy's parking space in a garage near the office. The parking fee was $600 for the year. All employees are allowed to buy furniture at a discounted price comparable to that charged to Peggy. However, the company does not pay other employees' parking fees. Peggy's gross income from the above is:
A)$0.
B)$600.
C)$3,500.
D)$4,100.
E)None of these.
Q2) Bob had a terminal illness and realized that he "can't take it with him." Therefore, he cashed in his insurance policy and received $120,000. He had paid $50,000 in premiums on the policy. He used the money to fulfill his lifelong ambitions of going to the Super Bowl, driving an expensive sports car, and vacationing in Bermuda.Was Bob's behavior consistent with the Congressional intent in providing the tax exemption he was permitted to use?
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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Sample Questions
Q1) Beige, Inc., an airline manufacturer, is conducting negotiations for the sale of military aircraft. One negotiation is with a U.S. assistant secretary of defense. She can close the deal on the purchase of 50 attack helicopters if she is paid $750,000 under the table. Another negotiation is with the minister of defense of a third world country. To complete the sale of 20 jet fighters to his government, he demands that he be paid a $1 million grease payment. Beige makes the payments and closes the deals. How much of these payments are deductible by Beige, Inc.?
Q2) Fines and penalties paid for violations of the law (e.g., illegal dumping of hazardous waste) are deductible only if they relate to a trade or business.
A)True
B)False
Q3) 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
Q4) In distinguishing whether an activity is a hobby or a trade or business, discuss the presumptive rule.
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Page 8
Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) If an account receivable written off during a prior year is subsequently collected during the current year, the amount collected must be included in the gross income of the current year to the extent it created a tax benefit in the prior year.
A)True
B)False
Q2) A nonbusiness bad debt deduction can be taken any year after the debt becomes totally worthless.
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) Losses on rental property are classified as deductions for AGI.
A)True
B)False
Q5) Discuss the effect of alimony in computing a net operating loss.
Q6) How is qualified production activities income (QPAI) calculated?
Q7) Why was the domestic production activities deduction (DPAD) enacted by Congress? Page 9
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Page 10
Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Sample Questions
Q1) Barry purchased a used business asset (seven-year property) on September 30, 2017, at a cost of $200,000. This is the only asset he purchased during the year. Barry did not elect to expense any of the asset under § 179, did not take additional first-year depreciation, and did not elect straight-line cost recovery. Barry sold the asset on July 17, 2018. Determine the cost recovery deduction for 2018.
A)$19,133
B)$24,490
C)$34,438
D)$55,100
E)None of the above
Q2) Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold.
A)True
B)False
Q3) On July 15, 2017, Mavis paid $275,000 for improvements on a commercial building she owns. Determine the maximum total cost recovery from the improvements in 2017.
Q4) Discuss the difference between the half-year convention and the mid-quarter convention.
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Chapter 9: Deductions: Employee and
Self-Employed-Related
Expenses
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Sample Questions
Q1) The IRS will issue advanced rulings as to whether a worker's status is that of an employee or an independent contractor.
A)True
B)False
Q2) Elsie lives and works in Detroit. She is the regional sales manager for a national fast-food chain. Due to unusual developments, she is compelled to work six straight weeks in the Cleveland area. Instead of spending the weekend there, she flies home every Friday night and returns early Monday morning. The cost of coming home for the weekend approximates $600. Had she stayed in Cleveland, deductible meals and lodging would have been $700. How much, if any, may Elsie deduct as to each weekend?
Q3) Actual cost method of determining car expense
Q4) A taxpayer who maintains an office in the home to conduct his only business will not have nondeductible commuting expense.
A)True
B)False
Q5) In terms of income tax treatment, what is the difference between common law and statutory employees?
Page 12
Q6) Mixed use (both business and pleasure) domestic travel.
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) In 2017, Boris pays a $3,800 premium for high-deductible medical insurance for himself and his family. In addition, he contributes $3,400 to a Health Savings Account. Which of the following statements is true?
A)If Boris is self-employed, he may deduct $7,200 as a deduction for AGI.
B)If Boris is self-employed, he may deduct $3,400 as a deduction for AGI and may include the $3,800 premium when calculating his itemized medical expense deduction.
C)If Boris is an employee, he may deduct $7,200 as a deduction for AGI.
D)If Boris is an employee, he may include $7,200 when calculating his itemized medical expense deduction.
E)None of the above.
Q2) Leona borrows $100,000 from First National Bank and uses the proceeds to purchase City of Houston bonds. The interest Leona pays on this loan is deductible as investment interest subject to the investment interest limits.
A)True
B)False
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Page 13
Chapter 11: Investor Losses
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Sample Questions
Q1) Pablo, who is single, has $95,000 of salary, $10,000 of income from a limited partnership, and a $27,000 passive activity 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 the above
Q2) Which of the following is not a factor that should be considered in determining whether an activity is treated as an appropriate economic unit?
A)The interdependencies between the activities.
B)The extent of common control.
C)The extent of common ownership.
D)The geographical location.
E)All of the above are relevant factors.
Q3) What special passive activity loss treatment is available to real estate activities?
Q4) Treatment of a disposition of a passive activity by gift.
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Page 14
Chapter 12: Alternative Minimum Tax
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Sample Questions
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) Business tax credits reduce the AMT and the regular income tax in the same way.
A)True
B)False
Q3) Frederick sells equipment whose adjusted basis for regular income tax purposes is $345,000 and for AMT purposes is $380,000. The sales proceeds are $850,000. Determine the effect on:
a.Taxable income. b.AMTI.
Q4) The AMT adjustment for mining exploration and development costs can be avoided if the taxpayer elects to deduct the expenditures in the year incurred for regular income tax purposes, rather than writing off the expenditures over a 10-year period for regular income tax purposes.
A)True
B)False
Page 15
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Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) The additional Medicare taxes assessed on high-income individuals carry differing tax rates depending on the tax base.
A)True
B)False
Q2) In terms of the withholding procedures, which statement does not reflect current rules?
A)Penalties can be imposed for filing false information with respect to wage withholding.
B)An employer need not verify the number of exemptions claimed by an employee on Form W-4 (Employee's Withholding Allowance Certificate).
C)An employee may claim fewer than the number of withholding allowances allowed, but not more.
D)In preparing the income tax return for the year, the employee is bound by the number of exemptions claimed for withholding purposes.
Q3) Discuss the treatment of unused general business credits.
Q4) All foreign taxes qualify for the foreign tax credit.
A)True B)False
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Sample Questions
Q1) What is the difference between the depreciation (or cost recovery) allowed and the depreciation (or cost recovery) allowable and what effect does each have on the adjusted basis of property?
Q2) Tobin inherited 100 acres of land on the death of his father in 2017. A Federal estate tax return was filed and the land was valued at $300,000 (its fair market value at the date of the death). The father had originally acquired the land in 1974 for $19,000 and prior to his death had made permanent improvements of $6,000. What is Tobin's basis in the land?
A)$19,000
B)$25,000
C)$300,000
D)$325,000
E)None of the above
Q3) Sam and Cheryl, husband and wife, own property jointly. The property has an adjusted basis of $400,000 and a fair market value of $500,000.
a.Discuss the rules for the calculation of the adjusted basis of the property to Sam if he inherits his wife's share of the property and Sam and Cheryl live in a community property state.
b.If they live in a common law state?
Page 17
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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 the above
Q2) Lola owns land as an investor. She exchanges the land for a warehouse which she leases to a tenant who uses it to store his business inventory. The exchange does qualify for like-kind exchange treatment.
A)True
B)False
Q3) Jake exchanges an airplane used in his business for a smaller airplane to be used in his business. His adjusted basis for the airplane is $325,000 and the fair market value is $310,000. The fair market value of the smaller airplane is $300,000. In addition, Jake receives cash of $10,000. Calculate Jake's realized and recognized gain or loss and his adjusted basis for the assets received.
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Page 18
Chapter 16: Property Transactions: Capital Gains and Losses
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Sample Questions
Q1) Ryan has the following capital gains and losses for 2017: $6,000 STCL, $5,000 28% gain, $2,000 25% gain, and $6,000 0%/15%/20% gain. Which of the following is correct:
A)The net capital gain is composed of $1,000 25% gain and $6,000 0%/15%/20% gain.
B)The net capital gain is composed of $5,000 28% gain and $2,000 0%/15%/20% gain.
C)The net capital gain is composed of $3,000 28% gain, $2,000 25% gain, and $2,000 0%/15%/20% gain.
D)The net capital gain is composed of $1,000 28% gain and $6,000 0%/15%/20% gain.
E)None of the above.
Q2) In 2017, Mark has $18,000 short-term capital loss, $7,000 28% gain, and $6,000 0%/15%/20% gain. Which of the statements below is correct?
A)Mark has a $5,000 capital loss deduction.
B)Mark has a $3,000 capital loss deduction.
C)Mark has a $13,000 net capital gain.
D)Mark has a $5,000 net capital gain.
E)Mark has a $18,000 net capital loss.
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Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Sample Questions
Q1) Which of the following would extinguish the § 1245 recapture potential?
A)An exchange of depreciable business equipment for like-kind business equipment with gain realized, but not recognized.
B)A nontaxable incorporation under § 351.
C)A nontaxable contribution to a partnership under § 721.
D)A nontaxable reorganization.
E)None of the above.
Q2) Depreciation recapture under § 1245 and § 1250 is reported on Form 4797.
A)True
B)False
Q3) For § 1245 recapture to apply, accelerated depreciation must have been taken on the property.
A)True
B)False
Q4) Involuntary conversion gains may be deferred if the proceeds of the involuntary conversion are reinvested.
A)True
B)False
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Chapter 18: Accounting Periods and Methods
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Sample Questions
Q1) Duck Company has valued its inventories at FIFO cost for the past 10 years. The company would like to change to the LIFO method, effective in 2018.
A)The election to change can be made with the 2018 tax return and the beginning inventory for 2018 will be the same as the FIFO inventory at the end of 2017 and no § 481 adjustment is required.
B)The beginning inventory value for 2018 must be computed as though the company had been using LIFO in all prior years and a § 481 adjustment is required.
C)The taxpayer must apply in 2017 for permission to change methods effective in 2018.
D)Duck must amend all prior years' tax returns to compute income by the LIFO method.
E)None of the above.
Q2) The ability of the CPA to timely prepare a tax return is a justification for the partnership's use of a particular tax year.
A)True
B)False
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Chapter 19: Deferred Compensation
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Q1) If an employer's contribution to a SEP IRA is less than $54,000 in 2017 (or 25% of the employee's earned income, if less), the employee can contribute the difference.
A)True
B)False
Q2) Explain to a small business owner some advantages and disadvantages of a simplified employee pension plan (SEP).
Q3) The maximum annual contribution to a Roth IRA for an unmarried taxpayer who is age 35 is the smaller of $5,500 or the individual's compensation for the year.
A)True
B)False
Q4) Dana contributes $2,000 too much to a § 401(k) plan which is not returned within 2 1/2 months after the close of the tax year. The employer will have to pay a tax of $200.
A)True
B)False
Q5) In a stock bonus plan, contributions are dependent on the employer's profits.
A)True
B)False
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Page 22
Chapter 20: Corporations and Partnerships
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Questions
Q1) Citron Company is a wholesale distributor of children's clothing. During the year, it donates clothes (cost of $60,000; retail value of $100,000) to Clothes for Needy (a qualified charitable organization). Disregarding percentage limitations, Citron's charitable contribution deduction is:
A)$80,000 if Citron is a C corporation.
B)$60,000 if Citron is a C corporation.
C)$100,000 if Citron is a C corporation.
D)$80,000 if Citron is an individual.
E)None of the above.
Q2) As of January 1, 2017, Donald, the sole shareholder of Sandpiper (a calendar year C corporation), had a basis in his stock of $50,000. During 2017, Sandpiper had an operating loss of $100,000 and distributed a $70,000 dividend to Donald. As of January 1, 2017, Sandpiper had accumulated E & P of $200,000. What is Donald's basis in his Sandpiper stock as of January 1, 2018?
A)($120,000)
B)($20,000)
C)$0
D)$50,000
E)None of the above
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Page 23