Individual Taxation Solved Exam Questions
Course Introduction
Individual Taxation explores the fundamental principles and applications of federal income tax law as it pertains to individuals. The course covers topics such as gross income, deductions, exemptions, tax credits, filing status, and the preparation of individual tax returns. Students will examine the Internal Revenue Code and related regulations, court cases, and IRS rulings, developing skills to analyze tax consequences of various personal and financial transactions. Real-world scenarios and problem-solving exercises reinforce an understanding of tax planning strategies and compliance obligations important for future professionals in accounting, finance, and law.
Recommended Textbook Principles of Taxation for Business and Investment Planning 2019 22nd Edition by Sally Jones
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Chapter 1: Taxes and Taxing Jurisdictions
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Q1) Which of the following sources of tax law carries the most authority?
A) Revenue procedure
B) Treasury regulation
C) Supreme Court decision
D) The three sources of tax law have equal authority
Answer: C
Q2) Which of the following is an example of a transaction-based tax?
A) A tax on net business income
B) An excise tax
C) An estate tax on the transfer of assets at death
D) Both an excise tax and an estate tax on the transfer of assets at death.
Answer: D
Q3) Which of the following is an earmarked tax?
A) A tax imposed on the purchase of specific items such as liquor or cigarettes
B) A tax that generates revenues that the government can spend only to build more
National Parks
C) A tax imposed only on individuals who earn more than $1 million annually
D) A tax that generates revenues that the government can spend for any purpose
Answer: B
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Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) Jurisdiction F levies a 10% excise tax on the purchase of golf carts. The annual revenue from this tax averages $800,000 (10% * $8 million average annual golf cart purchases). Jurisdiction F is considering raising the tax rate to 12%. Which of the following statements is true?
A) The rate increase will increase revenue by $160,000.
B) Based on a dynamic forecast, the rate increase will increase revenue by $160,000.
C) Based on a static forecast, the rate increase will increase revenue by $160,000.
D) None of the above is true.
Answer: C
Q2) Mr and Mrs Boln earn $63,000 annual income and pay 20% in state and federal income tax. If tax rates increase so that the couple's annual rate increases to 25%, how much additional income must they earn to maintain their after-tax standard of living?
Answer: The Bolns' after-tax income before the rate increase is $50,400 ($63,000[$63,000 × 20%]). To maintain their after-tax income after the rate increase, the Bolns must earn $4,200 additional income to increase their before-tax income to $67,200 ($50,400 / 75%) on which they will pay $16,800 tax.
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Chapter 3: Taxes as Transaction Costs
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Sample Questions
Q1) Every business transaction results in a current tax cost or tax savings.
A)True
B)False
Answer: False
Q2) Pepper Company, which has a 25% marginal tax rate, must choose between two alternative transactions. Transaction 1 requires a $20,400 cash outlay that is a deductible current expense. Transaction 2 requires a $15,000 cash outlay that is a nondeductible current expense. Which transaction has the lesser after-tax cost to Pepper?
Answer: Transaction 1 has a $15,300 after-tax cost ($20,400 before-tax cost - $5,100 tax savings from deduction). Transaction 2 has a lesser after-tax cost of only $15,000.
Q3) A taxpayer's marginal tax rate and discount rate are independent variables in the NPV calculation.
A)True
B)False
Answer: True
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Chapter 4: Maxims of Income Tax Planning
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Q1) A planning strategy that defers a tax cost without deferring the receipt of before-tax cash flows decreases the NPV of the transaction.
A)True
B)False
Q2) The substance over form doctrine allows the IRS to look through the legal formalities of a transaction to determine its true economic nature.
A)True
B)False
Q3) Mr Dole needed to sell appreciated stock out of his investment portfolio to generate cash to pay for his Christmas spending. He decided to postpone the sale from December 20Y1 until January 20Y2. Mr Dole is taking advantage of the:
A) Entity variable
B) Time period variable
C) Jurisdiction variable
D) Character variable
Q4) Tax evasion is a federal crime punishable by imprisonment.
A)True
B)False
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Chapter 5: Tax Research
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Sample Questions
Q1) Private letter rulings are authoritative only for the specific taxpayer to whom they are issued and cannot be relied on as authority by any other taxpayer.
A)True
B)False
Q2) Step 4 of the tax research process is to repeat steps 1 through 3 as many times as necessary.
A)True
B)False
Q3) Which of the following statements regarding the tax research process is true?
A) Before a researcher can analyze the tax consequences of a transaction, he or she must thoroughly understand the transaction.
B) Tax research is often conducted as part of both tax compliance and tax planning activities.
C) Tax research is a critical skill for the tax practitioner.
D) All of the above statements are true.
Q4) Tax judicial decisions each have a single, unique citation.
A)True
B)False
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Chapter 6: Taxable Income from Business Operations
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Q1) Which of the following statements about tax expense per books and tax payable is false?
A) If a corporation has no temporary differences between book income and taxable income, tax expense per books equals tax payable.
B) If a corporation has no permanent differences between book income and taxable income, tax expense per books equals tax payable.
C) Tax expense per books and tax payable are calculated from the same rate schedule.
D) If a corporation has no permanent differences between book income and taxable income, tax expense per books equals tax payable and tax expense per books and tax payable are calculated from the same rate schedule.
Q2) The tax law does not allows deductions based on estimated expenses that result in an allowance or reserve for financial statement purposes.
A)True
B)False
Q3) Political lobbying expenses are nondeductible.
A)True B)False
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Q1) Purchased goodwill is amortizable both for book and tax accounting purposes.
A)True
B)False
Q2) Mallow Inc., which has a 21% tax rate, purchased a new business asset. First-year book depreciation was $37,225, and first-year MACRS depreciation was $55,025. As a result of this book/tax difference, Mallow recorded a $3,738 deferred tax asset.
A)True
B)False
Q3) Norwell Company purchased $1,413,200 of new business equipment on July 10, 2018. This was Norwell's only asset purchase for its 2018 taxable year. Compute Norwell's total tax depreciation deduction for this 7-year recovery property.
A) $1,413,200
B) $201,946
C) $1,021,848
D) $1,026,134
Q4) Environmental clean-up costs are generally deductible in the year incurred.
A)True
B)False
Page 9
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Chapter 8: Property Dispositions
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Sample Questions
Q1) Schatz Corporation generated $8,083,000 ordinary business income and recognized a $73,900 net capital gain on the sale of assets. Which of the following statements is true?
A) Schatz must pay tax at the regular corporate rate on $8,156,900 taxable income.
B) Schatz must pay tax at the regular corporate rate on $8,083,000 taxable income. The $73,900 capital gain is eligible for a preferential tax rate.
C) Schatz's net capital gain results in a permanent book/tax difference.
D) None of the above is true.
Q2) Winslow Company sold investment land to an unrelated purchaser. The purchaser paid $250,000 cash, assumed Winslow's $600,000 mortgage on the land, and gave Winslow its $580,000 ten-year, interest-bearing note. Compute Winslow's amount realized on sale.
A) $250,000
B) $830,000
C) $850,000
D) $1,430,000
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Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) On January 21, 2007, Andy purchased 350 shares of Baker common stock for $24,500. On November 13, 2018, he sold the 350 shares for $7,250. On December 1, 2018, Andy purchased 350 shares of Baker common stock for $8,000. What is Andy's basis in these shares?
A) $8,000
B) $25,250
C) $24,500
D) $17,250
Q2) Vandals destroyed a business asset owned by L&L Company. L&L's adjusted tax basis in the asset was $60,800, and the reimbursement from its property insurance company was $90,000. L&L must pay at least $60,800 for a replacement asset in order to defer gain recognition on the involuntary conversion.
A)True
B)False
Q3) Which of the following statements about like-kind exchanges is false?
A) Like-kind property must be held for either business or investment use.
B) Businesses cannot engage in like-kind exchanges of inventory.
C) Businesses cannot engage in like-kind exchanges of intangible assets.
D) Business cannot exchange undeveloped land for developed real estate.
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Page 11
Chapter 10: Sole Proprietorships
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Sample Questions
Q1) Gavin owns a 50% interest in London Partnership. His tax basis in his partnership interest at the beginning of the year was $20,000. His partnership Schedule K-1 showed the following:
Ordinary business income
\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)$ 60,000
Share of partnership debt, beginning of year \(\quad\) 10,000
Share of partnership debt, end of year \(\quad\)\(\quad\)\(\quad\) 15,000
Calculate Gavin's tax basis in his partnership interest at the end of the year?
A) $85,000
B) $95,000
C) $75,000
D) $65,000
Q2) A partner's distributive share of partnership profits will increase his or her tax basis in the partnership interest.
A)True
B)False
Q3) Corporations cannot be shareholders in an S corporation.
A)True
B)False
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Page 12
Chapter 11: The Corporate Taxpayer
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Q1) Weston Corporation has accumulated minimum tax credits of $134,000 from tax years prior to 2018. If 2018 regular tax before credits is $47,000 and Jackson qualifies for general business credits of $14,000, its allowable minimum tax credit for 2018 is:
A) $134,000
B) $47,000
C) 83,500
D) $100,000
Q2) Harmon, Inc. was incorporated and began business on January 1, 2017. Its tax liability for 2017 was $36,000. Its tax liability for 2018 was $50,000. Which of the following is a correct statement concerning the payment of estimated taxes for 2018?
A) Harmon must pay $12,500 on the 15th day of April, June, September, and December.
B) Harmon must pay $9,000 on the 15th day of April, June, September and December.
The $14,000 balance is payable by April 15, 2019.
C) Harmon may pay the $50,000 tax no later than April 15, 2019.
D) None of the above statements is correct.
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Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) Compute Dodger's accumulated earnings tax, assuming that it had accumulated $130,000 after-tax income in prior years.
A) $0
B) $100,000
C) $76,000
D) $50,000
Q2) Betsy Williams is the sole shareholder of Kurt Corporation. She also owns the office building that serves as corporate headquarters for Kurt. Last year, Kurt paid $200,000 annual rent to Betsy for use of the building. Kurt's marginal tax rate was 21 percent and Betsy's marginal tax rate was 37 percent. The revenue agent who audited Kurt's return concluded that the fair rental value of the office building was $140,000.
a. What effect does this conclusion have on Betsy's personal income tax liability?
b. What effect does this conclusion have on Kurt's corporate income tax liability?
Q3) The personal holding company tax is a penalty tax imposed in addition to the regular income tax.
A)True
B)False
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Chapter 13: Jurisdictional Issues in Business Taxation
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Q1) Which of the following statements about income tax treaties is false?
A) An income tax treaty is a bilateral agreement between the governments of two countries defining and limiting each country's respective tax jurisdiction.
B) The provisions of income tax treaties pertain only to individuals and corporations that are residents of either treaty country.
C) Under a typical treaty, the non-resident country would only tax a firm's profits if the firm maintained a permanent establishment in that country.
D) Under a typical treaty, a firm's profits would be allocated to the countries in a manner similar to the apportionment of income among states under the UDITPA formula.
Q2) Which of the following taxes is eligible for the foreign tax credit?
A) Property taxes paid to a foreign country on the value of property owned in that country.
B) Value-added taxes assessed on the value of inventory manufactured in a foreign country.
C) Income tax assessed by a local government within a foreign country.
D) Sales tax assessed on the purchase of consumer goods in a foreign country.
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Chapter 14: The Individual Tax Formula
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Q1) Mr and Mrs Warren's AGI last year was $90,300, and their total tax was $13,988. This year, the couple's total tax is $14,700. Unless the Warrens paid at least $13,988 in the form of withholding and quarterly estimated payments, they will incur an underpayment penalty this year.
A)True
B)False
Q2) Mr and Mrs Dell, ages 29 and 26, file a joint return and have no dependents for the year. Here is their relevant information. Standard Deduction Table.
Salaries $ 163,000
Dividend income 1,900
Above-the-line deductions 6,200
Itemized deductions 26,200
Compute their adjusted gross income (AGI) and taxable income.
A) AGI $164,900; taxable income $134,700
B) AGI $158,700; taxable income $132,500
C) AGI $158,700; taxable income $108,500
D) AGI $164,900; taxable income $8,500
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Page 16
Chapter 15: Compensation and Retirement Planning
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Q1) Wages paid by an employer to an employee who is the employer's child under age 18 are not subject to federal FICA and unemployment taxes.
A)True
B)False
Q2) Olan Inc. provides an on-site day care center free of charge to employees who have pre-school children. Employees who enroll their children may exclude the value of this fringe benefit from gross income.
A)True
B)False
Q3) Mr Thano, age 47, withdrew $22,000 from his employer-sponsored qualified retirement plan to pay for his daughter's wedding. Compute the tax cost of the withdrawal if Mr Thano has a 37% marginal tax rate on ordinary income.
A) $2,200
B) $8,140
C) $10,340
D) $11,000
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Chapter 16: Investment and Personal Financial Planning
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Q1) In 2017, Mr Yang paid $160,000 for a corporate bond with a $200,000 stated redemption value. Based on the bond's yield to maturity, amortization of the $40,000 discount was $3,024 in 2017 and $2,960 in 2018. Mr Yang sold the bond for $169,500 in December 2018. What are his tax consequences in each year assuming that:
a. He bought the newly issued bond from the corporation?
b. He bought the bond in the public market through his broker?
Q2) The tax consequences of a business activity are generally the same as the tax consequences of an investment activity.
A)True
B)False
Q3) Revenue generated by the unearned income Medicare contribution tax is earmarked for the Medicare trust fund.
A)True
B)False
Q4) Gain on sale of qualified small business stock is taxed at a maximum rate of 15%.
A)True
B)False
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Chapter 17: Tax Consequences of Personal Activities
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Q1) Mr and Mrs Darwin sold their principal residence on September 12, 2017, and purchased and moved into a new residence three weeks later. They excluded their $353,000 gain realized on this sale from gross income. On October 2, 2018, the Darwins realized a gain on sale of the new residence. Which of the following statements about this gain is true?
A) If the Darwins sold the new residence because of a change in place of Mr. Darwin's employment, they may exclude up to $500,000 of the gain from gross income.
B) The Darwins may not exclude any of the gain from gross income.
C) The Darwins may exclude $147,000 of the gain from gross income.
D) None of the above statements is true.
Q2) A flood (a federally declared disaster) destroyed an antique Persian rug owned by Mr and Mrs McConnell. The couple purchased the rug for $13,000 fifteen years ago, but its appraised FMV before the flood was $42,500. Unfortunately, their homeowners' insurance policy does not cover flood damage. Compute the McConnells' casualty loss (before the 10% AGI threshold).
A) $41,900
B) $42,000
C) $13,000
D) $12,900
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Page 19
Chapter 18: The Tax Compliance Process
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Q1) Which type of audit can be handled entirely by telephone or through the mail?
A) Correspondence examination
B) Office examination
C) Field examination
D) All of the above
Q2) Which of the following should increase the likelihood that Mr and Mrs McNut's Form 1040 will be selected for audit by the IRS?
A) Mrs McNut is an employee of the federal government.
B) The McNuts claimed two additional standard deductions because they are both over age 65.
C) The McNuts excluded $7,705 interest earned on a City of Pittsburg municipal bond from their gross income.
D) The McNuts reported a $22,600 nonbusiness bad debt for a loan to their grandchild as a capital loss on Schedule D.
Q3) If a taxpayer fails to pay a deficiency after receiving notice of the deficiency, the IRS can garnish the taxpayer's salary or wage to settle the liability.
A)True
B)False
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