Individual Taxation Exam Materials
Course Introduction
Individual Taxation is a comprehensive course that explores the principles, laws, and regulations governing the taxation of individuals in the United States. Students will examine the components of gross income, allowable deductions, tax credits, and filing statuses, while gaining insight into tax planning strategies and compliance requirements. The course provides practical experience in preparing individual income tax returns and interpreting Internal Revenue Code provisions, equipping students with the skills needed for both personal financial management and entry-level positions in tax-related fields. Ethical considerations and the implications of current tax policy reforms are also discussed throughout the curriculum.
Recommended Textbook
South Western Federal Taxation 2013 Comprehensive 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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Q1) Which of the following is a characteristic of the audit process?
A)Most taxpayer audits involve "special" agents.
B)Self-employed taxpayers are less likely to be selected for audit than employed taxpayers.
C)Less important issues are handled by means of a correspondence audit.
D)If a taxpayer disagrees with the IRS auditor's finding, the only resort is to the courts.
E)None of the above.
Answer: C
Q2) For state income tax purposes, a majority of states allow a deduction for Federal income taxes.
A)True
B)False Answer: False
Q3) Before the Sixteenth Amendment to the Constitution was ratified, there was no valid Federal income tax on individuals.
A)True
B)False Answer: False
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Chapter 2: Working With the Tax Law
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Q1) Electronic databases are most frequently searched by the keyword approach.
A)True
B)False
Answer: True
Q2) House members have considerable latitude to make amendments on the House floor.
A)True
B)False
Answer: False
Q3) There is a direct conflict between a Code section adopted in 2004 and a treaty with France (signed in 2008).The Code section controls.
A)True
B)False
Answer: False
Q4) 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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Chapter 3: Computing the Tax
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Q1) For dependents who have income, special filing requirements apply.
A)True
B)False
Answer: True
Q2) In terms of the tax formula applicable to individual taxpayers, which, if any, of the following statements is correct?
A)In arriving at AGI, a taxpayer must elect between claiming deductions for AGI and deductions from AGI.
B)In arriving at taxable income, a taxpayer must elect between claiming deductions for AGI and deductions from AGI.
C)If a taxpayer has deductions for AGI, the standard deduction is not available.
D)In arriving at taxable income, a taxpayer must elect between deductions for AGI and the standard deduction.
E)None of the above.
Answer: E
Q3) An "above the line" deduction refers to a deduction for AGI.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Gross Income: Concepts and Inclusions
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Q1) When stock is sold after the record date for a dividend that has been declared, the seller must recognize as income the dividend received.
A)True
B)False
Q2) In December 2012, Mary collected the December 2012 and January 2013 rent from a tenant.Mary is a cash basis taxpayer.The amount collected in December 2012 for the 2013 rent should be included in her 2013 gross income.
A)True
B)False
Q3) 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
Q4) If the alimony recapture rules apply, the recipient of the alimony decreases his or her AGI by a portion of the amount included in gross income as alimony in a prior year or years.
A)True B)False
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Chapter 5: Gross Income: Exclusions
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Q1) 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
Q2) A U.S.citizen who works in France from February 1, 2011 until January 31, 2012 is not eligible for the foreign earned income exclusion in 2011 but is eligible for it in 2012.
A)True
B)False
Q3) Meg's employer carries insurance on its employees that will pay an employee his or her regular salary while the employee is away from work due to illness.The premiums for Meg's coverage were $1,200.Meg was absent from work for two months as a result of a kidney infection.Meg's employer's insurance company paid Meg's regular salary of $8,000 while she was away from work.Meg also collected $2,000 on a wage continuation policy she had purchased. Meg is not taxed on any of the above amounts.
A)True
B)False
Q4) 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) 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) The cost of legal advice associated with the preparation of an individual's Federal income tax return is not deductible because it is a personal expense.
A)True
B)False
Q3) A taxpayer who claims the standard deduction cannot also deduct expenses that are classified as deductions from AGI.
A)True
B)False
Q4) None of the prepaid rent paid on November 1 by a calendar year cash basis taxpayer for the next 18 months is deductible in the current period.
A)True
B)False
Q5) Are there any exceptions to the rule that personal expenditures cannot be deducted?
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Page 8
Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) Alicia was involved in an automobile accident in 2012.Her car was used 60% for business and 40% for personal use.The car had originally cost $40,000.At the time of the accident, the car was worth $20,000 and Alicia had taken $8,000 of depreciation.The car was totally destroyed and Alicia had let her car insurance expire.If Alicia's AGI is $50,000 (before considering the loss), determine her itemized deduction for the casualty loss.
A)$4,500.
B)$6,100.
C)$8,000.
D)$24,000.
E)None of the above.
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) How is qualified production activities income (QPAI) calculated?
Q4) Discuss the effect of alimony in computing a net operating loss.
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Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Q1) Discuss the tax consequences of listed property being used for the production of income compared to being used in a trade or business.
Q2) On June 1, 2012, James places in service a new automobile that cost $40,000.The car is used 60% for business and 40% for personal use.(Assume this percentage is maintained for the life of the car.) James does take additional first-year depreciation.Determine the cost recovery deduction for 2012.
A)$1,776.
B)$1,836.
C)$6,636.
D)$8,000.
E)None of the above.
Q3) Norm purchases a new sports utility vehicle (SUV) on October 12, 2012, for $50,000.The SUV has a gross vehicle weight of 6,200 lbs.It is used 100% of the time for business and it is the only business asset acquired by Norm during 2012.Compute the maximum deduction with respect to the SUV for 2012. Norm does take additional first-year depreciation.
Q4) Land improvements are generally not eligible for cost recovery.
A)True B)False
10
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Chapter 9: Deductions: Employee and Self-Employed
Related Expenses
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Q1) Elaine, the regional sales director for a manufacturer of exercise equipment, pays $2,500 to rent a skybox for a visiting performance of the Harlem Globetrotters.The skybox holds 10 seats, and Elaine invites 7 clients to the event.Nonluxury seats range in price from $80 to $120.The refreshments provided during the event cost $600.If Elaine meets all of the requirements for deductibility (i.e., business discussion, substantiation), she may deduct:
A)$1,550.
B)$1,500.
C)$1,260.
D)$1,100.
E)$900.
Q2) In terms of income tax treatment, what is the difference between common law and statutory employees?
Q3) Ethan, a bachelor with no immediate family, uses the Pine Shadows Country Club exclusively for his business entertaining.None of Ethan's annual dues for his club membership are deductible.
A)True
B)False
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) During the current year, Maria and her three dependent children had annual physical exams, which cost $750, and dental checkups for all four of them, which cost $420. In addition, Maria paid $800 for medically supervised treatments to enable her to stop smoking. After she stopped smoking, she began to gain weight and incurred $1,200 in costs for a medically supervised weight loss program. Which of these expenses qualify for the medical deduction?
Q2) 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
Q3) Any personal expenditures not specifically allowed as itemized deductions by the tax law are nondeductible (unless they are deductible in arriving at AGI).
A)True
B)False
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Page 12
Chapter 11: Investor Losses
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Q1) Rachel participates 150 hours in Activity A and 400 hours in Activity B, both of which are nonrental businesses.Both activities are passive.
A)True
B)False
Q2) Kenton has investments in two passive activities.Activity A, acquired three years ago, produces income in the current year of $60,000.Activity B, acquired last year, produces a loss of $110,000 in the current year.At the beginning of this year, Kenton's at-risk amounts in Activities A and B are $10,000 and $120,000, respectively.What is the amount of Kenton's suspended passive loss with respect to these activities at the end of the current year?
A)$100,000.
B)$50,000.
C)$40,000.
D)$0.
E)None of the above.
Q3) Identify how the passive loss rules broadly classify various types of income and losses.Provide examples of each category.
Q4) What special passive loss treatment is available to real estate activities?
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Page 13
Chapter 12: Tax Credits and Payments
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Q1) Some foreign taxes do not qualify for the foreign tax credit.
A)True
B)False
Q2) Child care payments to a relative are not eligible for the credit for child and dependent care expenses if the relative is a child (under age 19) of the taxpayer.
A)True
B)False
Q3) Qualifying tuition expenses paid from the proceeds of a tax-exempt scholarship do not give rise to an education tax credit.
A)True
B)False
Q4) Black Company paid wages of $360,000, of which $80,000 was qualified wages for the work opportunity tax credit under the general rules.Black Company's deduction for wages for the year is:
A)$280,000.
B)$328,000.
C)$332,000.
D)$360,000.
E)None of the above.
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Chapter 13: Property Transactions: Determination of Gain or
Loss, Basis Considerations, and Nontaxable
Exchanges-Part 2
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Q1) Lynn transfers her personal use automobile to her business (a sole proprietorship).The car's adjusted basis is $35,000 and the fair market value is $12,000.No cost recovery had been deducted by Lynn, since she held the car for personal use.Determine the adjusted basis of the car to Lynn's sole proprietorship including the basis for cost recovery.
Q2) Define an involuntary conversion.
Q3) Discuss the relationship between the postponement of realized gain under § 1031 (like-kind exchanges) and the adjusted basis and holding period for the replacement property.
Q4) Melissa, age 58, marries Arnold, age 50, on June 1, 2012.Melissa decides to sell her principal residence on August 1, 2012, which she has owned and occupied for the past 30 years.Arnold has never owned a house.However, while he was married to Kelly who died 6 months prior to his marriage to Melissa, Kelly used the § 121 election on the sale of her residence in January 2010 to reduce her realized gain from $123,000 to $0.Kelly used the sales proceeds to pay off Arnold's gambling debts.Can Melissa elect the § 121 exclusion on the sale of her residence? What is the maximum § 121 exclusion available to Melissa and Arnold if they file a joint return?
Page 15
Q5) What is a deathbed gift and what tax consequences apply?
Q6) What kinds of property do not qualify under the like-kind provisions?
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Chapter 13: A: Property Transactions: Determination
of
Gain
or Loss, Basis Considerations, and Nontaxable Exchanges-Part 1
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Q1) If the amount of a corporate distribution is less than the amount of the corporate earnings and profits, the return of capital concept does not apply and the shareholders' adjusted basis for the stock remains unchanged.
A)True
B)False
Q2) The bank forecloses on Lisa's apartment complex.The property had been pledged as security on a nonrecourse mortgage, whose principal amount at the date of foreclosure is $750,000.The adjusted basis of the property is $480,000, and the fair market value is $750,000.What is Lisa's recognized gain or loss?
A)$270,000.
B)($750,000).
C)$0.
D)($480,000).
E)None of the above.
Q3) A condemned office building owned and used in the business by a taxpayer can be replaced by land and qualify for nonrecognition treatment.
A)True
B)False
Page 17
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Chapter 14: Property Transactions: Capital Gains and Losses,
1231, Recapture Provisions
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Q1) The § 1245 depreciation recapture potential does not reduce the amount of the charitable contribution deduction under § 170.
A)True
B)False
Q2) Personal use property casualty gains and losses are not subject to the § 1231 rules.
A)True
B)False
Q3) Red Company had an involuntary conversion on December 23, 2012.The machinery had been acquired on April 1, 2010, for $49,000 and its adjusted basis was $14,200.The machinery was completely destroyed by fire and Red received $10,000 of insurance proceeds for the machine and did not replace it.This was Red's only casualty or theft event for the year.As a result of this event, Red initially has:
A)$10,000 § 1231 loss.
B)$10,000 § 1245 recapture gain.
C)$4,200 casualty loss.
D)$4,200 § 1231 loss.
E)None of the above.
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Page 18
Chapter 15: Alternative Minimum Tax
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Q1) Akeem, who does not itemize, incurred a net operating loss (NOL) of $50,000 in 2012.His deductions in 2012 included AMT tax preference items of $20,000, and he had no AMT adjustments.Assuming the NOL is not carried back, what is Akeem's ATNOLD carryover to 2013?
A)$50,000.
B)$30,000.
C)$20,000.
D)$40,000.
E)None of the above.
Q2) A tax preference can increase or decrease alternative minimum taxable income while an adjustment can only increase alternative minimum taxable income.
A)True
B)False
Q3) In determining the amount of the AMT adjustments, discuss the difference in the treatment of a building placed in service after 1986 and before January 1, 1999 and a building placed in service after December 31, 1998.
Q4) The AMT does not apply to qualifying "small corporations."
A)True
B)False
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Chapter 16: Accounting Periods and Methods
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Q1) Which of the following statements regarding a 52-53 week tax year is not correct?
A)Some tax years will include more than 366 calendar days.
B)Whether the particular tax year includes 52 weeks or 53 weeks is not elective.
C)The year-end must be the same day of the week in all years.
D)All of the above are correct.
E)None of the above is correct.
Q2) Charlotte sold her unincorporated business for $600,000 in 2012.The sales contract allocated $120,000 to equipment, $300,000 to land, and $180,000 to goodwill.Charlotte had a $0 basis in the goodwill, the land cost $150,000, and the equipment originally cost $250,000 but it was fully depreciated.What is the amount of the gain eligible for installment sales treatment?
A)$0.
B)$330,000.
C)$450,000.
D)$600,000.
E)None of the above.
Q3) What incentives do the tax accounting rules provide for taxpayers to voluntarily change from an incorrect method of accounting that has reduced the company's tax liability in prior years?
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Page 20
Chapter 17: Corporations: Introduction and Operating Rules
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Q1) Almond Corporation, a calendar year C corporation, had taxable income of $900,000, $1.1 million, and $1.2 million for 2009, 2010, and 2011, respectively. Almond's taxable income is $2 million for 2012. Compute the minimum estimated tax payments for 2012 for Almond Corporation.
Q2) Because of the taxable income limitation, no dividends received deduction is allowed if a corporation has an NOL for the current taxable year.
A)True
B)False
Q3) In the current year, Amber, Inc., a calendar C corporation, has income from operations of $200,000 and operating deductions of $225,000. Amber also had $30,000 of dividends from a 25% stock ownership in a domestic corporation. Which of the following statements is incorrect with respect to Amber's net operating loss deduction?
A)The NOL is carried back 3 years and forward 10 years by Amber.
B)Amber's NOL is $19,000.
C)A dividends received deduction is allowed in computing Amber's NOL.
D)Amber can elect to forgo the carryback period and only carry forward the NOL.
E)None of the above.
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Page 21
Chapter 18: Corporations: Organization and Capital Structure
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Q1) Shawn transfers property (basis of $40,000 and fair market value of $35,000) to Condor Corporation in exchange for § 1244 stock. The transfer qualifies as a nontaxable exchange under § 351; therefore, Shawn's basis in the Condor stock is $40,000. Five years later, Shawn sells the Condor stock for $25,000. With respect to the sale, Shawn has:
A)An ordinary loss of $15,000.
B)An ordinary loss of $10,000 and a capital loss of $5,000.
C)A capital loss of $15,000.
D)A capital loss of $10,000 and an ordinary loss of $5,000.
E)None of the above.
Q2) All accounts payable of a cash basis taxpayer are included as liabilities under § 357(c) in determining whether liabilities exceed basis.
A)True
B)False
Q3) Similar to like-kind exchanges, the receipt of "boot" under § 351 can cause gain to be recognized.
A)True
B)False
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Page 22
Chapter 19: Corporations: Distributions Not in Complete
Liquidation
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Q1) A realized gain from an involuntary conversion under § 1033 that is not recognized for income tax purposes has no effect on E & P.
A)True
B)False
Q2) Lucinda owns 1,100 shares of Blackbird Corporation stock at a time when Blackbird has 2,000 shares of stock outstanding.The remaining shareholders are unrelated to Lucinda.What is the minimum number of shares Blackbird must redeem from Lucinda so that the transaction will qualify as a disproportionate redemption?
A)220.
B)393.
C)484.
D)880.
E)None of the above.
Q3) 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
Q4) Explain the stock attribution rules that apply in the case of stock redemptions.
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) Indigo has a basis of $1 million in the stock of Owl Corporation, a subsidiary in which it owns 100% of all classes of stock. Indigo purchased the stock in Owl 10 years ago. In the current year, Indigo liquidates Owl and acquires assets worth $1.2 million. At the time of its liquidation, Owl Corporation had a basis of $800,000 in the assets and E & P of $500,000.Which of the following statements is correct with respect to the liquidation?
A)Owl recognizes a gain of $400,000.
B)Indigo has an $800,000 basis in the assets.
C)Owl's E & P of $500,000 is eliminated.
D)Indigo recognizes a gain of $200,000.
E)None of the above.
Q2) The gains shareholders recognize as a part of a corporate reorganization may be treated a dividend to the extent of the corporation's E & P.
A)True
B)False
Q3) Explain whether shareholders are exempted from gain/loss recognition in nontaxable corporate reorganization or the gain/loss recognition is merely postponed.If postponed, what is the vehicle for ensuring the postponed gain/loss will be recognized in the future?
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Chapter 21: Partnerships
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Q1) Beth has an outside basis of $100,000 in the BBDE Partnership as of December 31 of the current year.On that date the partnership liquidates and distributes to Beth a proportionate distribution of $50,000 cash and inventory with an inside basis to the partnership of $10,000 and a fair market value of $16,000.In addition, Beth receives a computer (not inventory) which has an inside basis and fair market value of $0 and $3,000, respectively.None of the distribution is for partnership goodwill.How much gain or loss will Beth recognize on the distribution, and what basis will she take in the computer?
A)$40,000 loss; $0 basis.
B)$37,000 loss; $3,000 basis.
C)$0 gain or loss; $3,000 basis.
D)$0 gain or loss; $40,000 basis.
E)None of the above.
Q2) A partnership is an association formed by two or more taxpayers (who must be individuals) to carry on a trade or business.
A)True
B)False
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Page 25
Chapter 22: S: Corporations
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Q1) The passive loss limitations apply at the S corporation shareholder level.
A)True
B)False
Q2) If an S corporation excludes cancellation of debt (COD) income from gross income, the excluded amount is applied to _________________ S corporation tax attributes.
Q3) Shareholders may deduct losses in excess of their basis in S corporation stock when a shareholder holds a loan basis of zero.
A)True
B)False
Q4) Charitable contributions are subject to a 10% limitation at the S corporation level.
A)True
B)False
Q5) Identify a disadvantage of being an S corporation.
A)Generally, trusts cannot be shareholders.
B)Losses flow through to the shareholders.
C)The AMT on corporations is avoided.
D)Tax-exempt income flows through to the shareholders.
E)None of the above is a disadvantage of the S election.
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Chapter 23: Exempt Entities
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Q1) An eligible § 501(c)(3) organization has made the § 501(h) election to participate in lobbying on a limited basis.If the ceiling on lobbying established in § 501(h) (lobbying nontaxable amount) is exceeded, what are the potential tax consequences to the exempt organization?
Q2) Engaging in a prohibited transaction can result in an exempt organization being subject to Federal income tax, but cannot cause it to lose its exempt status unless the exempt organization repeats the prohibited transaction.
A)True
B)False
Q3) If an organization qualifies for exempt status for Federal income tax purposes, it is exempt from all Federal income taxes.
A)True
B)False
Q4) Loyal, Inc., is a §501(c)(3) organization that is not classified as a private foundation.During the current year, it is subject to intermediate sanctions.What other options does the IRS have in dealing with an exempt organization engaging in prohibited transactions?
Q5) Why are some organizations exempt from Federal income tax?
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Chapter 24: Multistate Corporate Taxation
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Q1) Typically, a sales/use tax is applied to a retail sale of ____________________ property.
Q2) P.L.86-272 ____________________ (does/does not) create nexus when the seller runs a booth with inventory samples, at a one-week trade show in the state.
Q3) A state wants to increase its income tax collections, but politically it would be unwise to raise taxes on in-state individuals or businesses. Identify some changes to the income tax apportionment formula that would shift the scheduled income tax increases to out-of-state businesses.
Q4) Most states' consumer sales taxes apply directly to the final purchaser of the taxable asset, who then remits the tax to the state treasury.
A)True
B)False
Q5) Roughly five percent of all taxes paid by businesses in the U.S.are to state, local, and municipal jurisdictions.
A)True
B)False
Q6) The starting point in computing state taxable income generally is
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Chapter 25: Taxation of International Transactions
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Questions
Q1) Flapp Corporation, a domestic corporation, conducts all of its transactions in the U.S.dollar.It sells inventory for $1 million to a Canadian company when the exchange rate is $1US: $1.2Can.The Canadian company pays for the inventory when the exchange rate is $1US: $1.25Can.What is Flapp's exchange gain or loss on this sale?
A)Flapp does not have a foreign currency exchange gain or loss, since it conducts all of its transactions in the U.S.dollar.
B)Flapp's account receivable for the sale is $1 million (when the exchange rate is $1US: $1.2Can.) and it collects on the receivable when the exchange rate is $1US: $1.25Can.Flapp has an exchange gain of $50,000.
C)Flapp's account receivable for the sale is $1 million (when the exchange rate is $1US: $1.2Can.).It collects on the receivable at $1US: $1.25Can.Flapp has an exchange loss of $5,000.
D)Flapp's foreign currency exchange loss is $50,000.
Q2) The source of income received for the use of intangible property is the home country of the owner of the property producing the income. A)True B)False
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Chapter 26: Tax Practice and Ethics
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Sample Questions
Q1) The IRS can waive the penalty for understating a tax liability if the taxpayer shows ____________________ for the position taken on the tax return.
Q2) A(n) $____________________ penalty applies if the tax preparer does not sign the client's tax return. or
Q3) Latrelle prepares the tax return for Whitehall Corporation. Latrelle includes a $5,000 deduction on the return.This type of deduction previously has been disallowed by the Tax Court, although there is a 15% chance that the holding will be reversed on an appeal by Whitehall. The return does not make any special disclosure that the deduction is being claimed. Whitehall paid Latrelle a fee of $8,000 for preparing the Form 1120. Latrelle is assessed a preparer penalty of $4,000 for taking an unreasonable position on the Whitehall return.
A)True
B)False
Q4) Circular 230 applies to all paid tax practitioners. This includes attorneys, CPAs, and enrolled agents, even though each of the groups has its own code of conduct.
A)True
B)False
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Page 30
Chapter 28: Income Taxation of Trusts and Estates
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Sample Questions
Q1) The Bard Estate incurs a $25,000 fee in disposing of the real property of the decedent. The deduction is claimed against the Federal estate tax, unless by election it is claimed on the estate's income tax return.
A)True
B)False
Q2) Tax planning motivations usually are secondary to other objectives in deciding whether to create a trust.
A)True
B)False
Q3) A gift to charity from its 2012 income is deductible on an estate's Form 1041 if it is made by the end of the ____________________ tax year.
Q4) Trusts can select any fiscal Federal income tax year.
A)True
B)False
Q5) The Circle Trust has some exempt interest income for the year. How does this investment income affect Circle's deduction of its fiduciary fees? Charitable contributions?
Q6) The Form 1041 of a calendar-year trust is due on ____________________ 15.
Q7) Every ____________________ trust is allowed a $300 personal exemption.
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