Introduction to Federal Taxation Study Guide Questions
Course Introduction
Introduction to Federal Taxation provides students with a foundational understanding of the principles, laws, and regulations governing federal income taxation in the United States. The course covers topics such as the determination of taxable income, allowable deductions, credits, and the calculation of tax liabilities for individuals and businesses. Emphasis is placed on the structure of the Internal Revenue Code, the role of the IRS, tax planning strategies, and the ethical responsibilities of taxpayers and professionals. This course equips students with the essential knowledge to recognize basic tax issues and prepares them for further study in taxation and related fields.
Recommended Textbook
McGraw Hills Essentials of Federal Taxation 2019 Edition 10th Edition by Spilker Brian C
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Chapter 1: An Introduction to Tax
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Q1) Milton and Rocco are having a heated debate regarding a national sales tax.Milton argues that a national sales tax is a proportional,vertically equitable tax.Rocco argues that a national sales tax would be a regressive,vertically inequitable tax.Explain both sides of the argument.
Answer: A sales tax by definition is a proportional tax - i.e.,as taxable purchases increase,the sales tax rate (i.e.,the marginal tax rate)remains constant.For this reason,Milton is correct.Nonetheless,when you consider that the proportion of one's total income spent on taxable purchases likely decreases as total income increases,the sales tax may be considered a regressive tax.For this reason,Rocco is correct. Vertical equity is achieved when taxpayers with greater ability to pay tax pay more tax relative to taxpayers with a lesser ability to pay tax.One can view vertical equity in terms of tax dollars paid or in terms of tax rates.Proponents of a sales tax (e.g.,Milton)are more likely to argue that vertical equity is achieved when taxpayers with a greater ability to pay tax pay more in tax dollars.Opponents of a national sales tax (e.g.,Rocco)are more likely to argue that taxpayers with a greater ability to pay should be subject to a higher tax rate.This view is based upon the argument that the relative burden of a sales tax decreases as a taxpayer's income (e.g.,disposable income)increases.
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Chapter 2: Tax Compliance, the Irs, and Tax Authorities
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Q1) Office examinations are the most common type of IRS audit.
A)True
B)False
Answer: False
Q2) Rebecca is at a loss.A new tax law was recently passed,and she needs to get a better understanding of why the tax law was passed and the intent of the law from an official authority.Describe what authorities may be especially helpful to Rebecca and why she can't find many authorities that discuss the new law.
Answer: The House Ways and Means Committee,Senate Finance Committee,and Joint Conference Committee each produce a committee report that explains the current tax law,proposed change in the law,and justification for the change.These committee reports are considered "statutory" sources of the tax law and may be very useful in interpreting tax law changes and understanding Congressional intent.This is especially important after new legislation has been enacted because,with the exception of the Code,there will be very little authority interpreting the new law (i.e.,no judicial or administrative authorities because of the time it takes for the new law to be litigated or for the IRS to issue interpretative guidance - e.g.,regulations,etc.).
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Page 4
Chapter 3: Tax Planning Strategies and Related Limitations
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Q1) A taxpayer instructing her son to collect rent checks for the taxpayer's property and to report this as taxable income on the son's tax return violates which doctrine?
A)Constructive receipt doctrine.
B)Implicit tax doctrine.
C)Assignment of income doctrine.
D)Step-transaction doctrine.
E)None of the choices are correct.
Answer: C
Q2) The concept of present value is an important part of the timing strategy.
A)True
B)False
Answer: True
Q3) The time value of money suggests that $1 in one year from now is worth less than $1 today.
A)True
B)False
Answer: True
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Chapter 4: Individual Income Tax Overview dependents and
Filing Status
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Q1) Filing status determines all of the following except ________
A)the applicable standard deduction amount.
B)the appropriate tax rate schedule or tax table.
C)the top stated marginal rate in the tax rate schedule.
D)the AGI threshold for reductions in certain tax benefits.
Q2) The relationship test for qualifying relative requires the potential qualifying relative to have a family relationship with the taxpayer.
A)True
B)False
Q3) The income tax base for an individual tax return is:
A)Realized income from whatever source derived.
B)Gross income.
C)Adjusted gross income.
D)Adjusted gross income minus from AGI deductions.
Q4) An individual may never be considered as both a qualifying relative and a qualifying child of the same taxpayer.
A)True
B)False
Page 6
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Chapter 5: Gross Income and Exclusions
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Q1) Which of the following statements about alimony payments is true for divorce agreements executed before 2019?
A)To qualify as alimony,payments must be made in cash.
B)Alimony payments are includible in the gross income of the recipient.
C)To qualify as alimony,payments cannot continue after the death of the recipient.
D)To qualify as alimony,payments must be made under a written agreement or divorce decree that does not designate the payments as "nonalimony" or child support.
E)All of the choices are correct.
Q2) Barter clubs are an effective means of avoiding realization for tax purposes.
A)True
B)False
Q3) Generally,85 percent of Social Security benefits are included in income of high income taxpayers.
A)True
B)False
Q4) Worker's compensation benefits are excluded from gross income.
A)True
B)False
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Chapter 6: Individual for Agi Deductions
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Q1) A passive activity is any activity that involves a trade or business or rental activity in which the taxpayer does not materially participate.
A)True
B)False
Q2) Passive losses that exceed passive income are deferred until the taxpayer generates passive income to offset these passive losses.
A)True
B)False
Q3) Ryan,age 48,received an $8,000 distribution from his traditional IRA to pay for medical expenses.Ryan has made only deductible contributions to the IRA and his marginal tax rate is 32 percent.What amount of taxes and early distribution penalties will Ryan be required to pay on the distribution?
Q4) Tatia,age 38,has made deductible contributions to her traditional IRA over the past few years.When her account balance was $32,000,she transferred the entire $32,000 out of her traditional IRA and immediately into a Roth IRA.Her current marginal tax rate is 24 percent.What amount of tax and penalty is she required to pay on this rollover?
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Chapter 7: Individual Income Tax Computation and Tax Credits
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Q1) Pyrrha,a 12-year-old dependent of Epimetheus and Pandora,received $8,200 of interest income in 2018.What is Pyrrha's gross tax liability for the year?
Q2) Maria and Tony are married.They are preparing to file their 2018 tax return.If they were to file as single taxpayers,Maria and Tony would report $40,000 and $60,000 of taxable income,respectively.On their joint tax return,their taxable income is $100,000.How much of a marriage penalty or benefit will Maria and Tony experience in 2018? (Use Tax Rate Schedule.)
Q3) Employees are allowed to deduct a portion of the FICA taxes they pay. A)True
B)False
Q4) In 2018,Shawn's AGI is $170,000.He earned the income evenly throughout the year.He owed $29,890 in federal income tax and self-employment taxes of $2,590.Last year,he had a gross tax liability of $50,000.What is the minimum quarterly estimated tax payment Shawn must pay each quarter to avoid underpayment penalties for 2018?
Q5) Tax credits reduce a taxpayer's taxable income dollar for dollar. A)True B)False
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Chapter 8: Business Income, deductions, and Accounting Methods
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Q1) Werner is the president and CEO of Acme,Inc.and this year he took a prospective client to dinner.During the dinner the President and the client discussed a proposed contract for over $6 million and personal matters.After dinner the CEO took the client to a football game and no business was discussed.The CEO paid $1,220 for an expensive dinner and spent $600 for tickets to the game.What is the deductible amount of these expenses?
Q2) Which of the following expenditures is most likely to be deductible for a construction business?
A)A fine for a zoning violation.
B)A tax underpayment penalty.
C)An "under the table" payment to a government representative to obtain a better price for raw materials.
D)A payment to a foreign official to expedite an application for a business permit.
E)An arm's length payment to a related party for emergency repairs of a sewage line.
Q3) All taxpayers must account for taxable income using a calendar year.
A)True
B)False
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Chapter 9: Property Acquisition and Cost Recovery
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Q1) Depletion is the method taxpayers use to recover their capital investment in natural resources.
A)True
B)False
Q2) Assume that Yuri acquires a competitor's assets on May 1 .The purchase price was $500,000.Of the amount,$325,000 is allocated to tangible assets and $175,000 is allocated to goodwill (a §197 intangible asset).What is Yuri's amortization expense for the current year? (Round final answer to the nearest whole number.)
Q3) Which of the following assets are eligible for §179 expensing?
A)Used office machinery.
B)Qualified improvement property.
C)A new delivery truck.
D)Used office furniture.
E)All of the choices are correct.
Q4) In general,major integrated oil and gas producers may take the greater of cost or percentage depletion.
A)True
B)False
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Chapter 10: Property Dispositions
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Q1) For a like-kind exchange,realized gain is deferred if the exchange is solely for like-kind property.
A)True
B)False
Q2) Brandy sold a rental house that she owned for $150,000.Brandy bought the house four years ago for $140,000 and has claimed $25,000 of depreciation expense.What is the amount and character of Brandy's gain or loss?
Q3) Which of the following is true regarding depreciation recapture?
A)Changes the character of a loss.
B)Changes the character of a gain.
C)Changes the amount of a gain.
D)Only applies to ordinary assets.
E)None of the choices are correct.
Q4) Alexandra sold equipment that she uses in her business for $100,000.Alexandra bought the equipment two years ago for $90,000 and has claimed $25,000 of depreciation expense.What is the amount and character of Alexandra's gain or loss?
Q5) The amount realized is the sale proceeds less the adjusted basis.
A)True
B)False
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Chapter 11: Entities Overview
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Q1) An S corporation shareholder who is not a passive investor is allowed to deduct a business loss allocation from the S corporation to the extent of the shareholder's basis in the stock no matter how large the loss.
A)True
B)False
Q2) S corporations have more restrictive ownership requirements than other entities.
A)True
B)False
Q3) Crocker and Company (CC)is a C corporation.For the year,CC reported taxable income of $550,000.At the end of the year,CC distributed all its after-tax earnings to Jimmy,the company's sole shareholder.Jimmy's marginal ordinary tax rate is 37 percent and his marginal tax rate on dividends is 23.8 percent,including the net investment income tax.What is the overall tax rate on Crocker and Company's pre-tax income?
A)18.8%
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Chapter 12: Corporate Formations and Operations
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Q1) The corporate tax form is Form 1065.
A)True
B)False
Q2) Which of the following class of stock is not allowed to be used in a section 351 transaction?
A)Voting common stock.
B)Voting preferred stock.
C)Nonvoting preferred stock.
D)All of the choices of classes of stock can be used in a section 351 transaction.
Q3) A taxpayer always will have a tax basis in boot received in a section 351 transaction equal to its fair market value.
A)True
B)False
Q4) Both Schedules M-1 and M-3 require taxpayers to identify book-tax differences as either temporary or permanent.
A)True
B)False
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Chapter 13: Corporate Nonliquidating and Liquidating
Distributions
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Q1) The "double taxation" of corporate income refers to the fact that corporate income is taxed at both the entity-level and the shareholder-level.
A)True
B)False
Q2) Tammy owns 60 percent of the stock of Huron Corporation.Unrelated individuals own the remaining 40 percent.For a stock redemption to be treated as an exchange under the "substantially disproportionate" rule,Tammy must reduce her stock ownership to below 48 percent.
A)True
B)False
Q3) Wildcat Corporation reports current E&P of negative $200,000 in year 1 and accumulated E&P at the beginning of the year of $100,000.Wildcat distributed $300,000 to its sole shareholder on December 31,year 1.How much of the distribution is treated as a dividend in year 1?
A)$0.
B)$100,000.
C)$200,000.
D)$300,000.
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Chapter 14: Forming and Operating Partnerships
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Q1) In what order are the loss limitations for partnerships applied?
A)Tax Basis - At-Risk Amount - Passive Activity Loss.
B)Passive Activity Loss - Tax Basis - At-Risk Amount.
C)Tax Basis - Passive Activity Loss - At-Risk Amount.
D)At-Risk Amount - Tax Basis - Passive Activity Loss.
Q2) In what order should the tests to determine a partnership's year end be applied?
A)majority interest taxable year - least aggregate deferral - principal partners test.
B)principal partners test - majority interest taxable year - least aggregate deferral.
C)principal partners test - least aggregate deferral - majority interest taxable year.
D)majority interest taxable year - principal partners test - least aggregate deferral.
E)None of the choices are correct.
Q3) Which of the following entities is not considered a flow-through entity?
A)C corporation.
B)S corporation.
C)Limited Liability Company (LLC).
D)Partnership.
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Chapter 15: Dispositions of Partnership Interests and Partnership Distributions
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Q1) Daniela is a 25% partner in the JRD Partnership.On January 1,JRD makes a proportionate distribution of $16,000 cash,inventory with a $16,000 fair value (inside basis $8,000),and accounts receivable with a fair value of $8,000 (inside basis of $12,000)to Daniela.JRD has no liabilities at the date of the distribution.Daniela's basis in her JRD partnership interest is $20,000.What is Daniela's basis in the distributed inventory and accounts receivable?
A)$2,000 inventory,$2,000 accounts receivable.
B)$8,000 inventory,$12,000 accounts receivable.
C)$0 inventory,$4,000 accounts receivable.
D)$16,000 inventory,$8,000 accounts receivable.
Q2) Jessica is a 25% partner in the JRL Partnership.On January 1,JRL distributes $40,000 cash to Jessica.JRL has no hot assets or liabilities at the date of the distribution.Jessica's basis in her JRL partnership interest is $28,000.What is the amount and character of Jessica's gain or loss from the distribution?
A)$0.
B)$12,000 ordinary income.
C)$12,000 capital loss.
D)$12,000 capital gain.
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Chapter 16: S Corporations
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Q1) Which of the following is not considered a family member for purposes of the S corporation shareholder limit test?
A)brother.
B)great-grandparent.
C)grandchildren.
D)grandparent.
E)none of the choices are correct.
Q2) XYZ was formed as a calendar-year S corporation with Xavier,Yolinda,and Zach as equal shareholders.On September 15,2018,XYZ's S election was terminated after Zach sold his XYZ shares (one-third of all shares)to his solely owned C Corporation Zach,Inc.Absent permission from the IRS,what is the earliest date XYZ may again elect to be taxed as an S corporation?
Q3) S corporation distributions of cash are not taxable to the shareholder to the extent of the combined shareholder's stock and debt basis.
A)True
B)False
Q4) S corporations are not entitled to a dividends received deduction.
A)True
B)False
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Chapter 17: Individual From Agi Deductions
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Q1) When taxpayers donate cash and capital gain property to a public charity, the AGI percentage limitation is applied in the following order:
A) a 30 percent of AGI limitation is applied to the aggregate donation.
B) a 60 percent of AGI limitation is applied to the cash donation and a 20 percent of AGI limitation is applied to the fair market value of the capital gain donation.
C) a 30 percent of AGI limitation is applied to the cash donation and a 20 percent of AGI limitation is applied to the fair market value of the capital gain donation.
D) a 60 percent of AGI limitation is applied to the cash donation and the fair market value of the capital gain donation is subject to the lesser of a 30 percent of AGI limitation or a 50 percent of AGI limitation after subtracting the cash contributions.
E) donations to public charities are not subject to AGI limitations.
Q2) Bunching itemized deductions is one form of tax evasion.
A)True
B)False
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