Introduction to Taxation Exam Preparation Guide
Course Introduction
Introduction to Taxation provides students with a foundational understanding of tax systems, principles, and practices in both national and global contexts. The course explores the objectives, structure, and administration of tax laws, focusing on areas such as income, property, corporate, and value-added taxation. Students gain insights into tax compliance, planning, and ethical considerations, as well as the impact of taxation on individuals, businesses, and society. By examining real-world scenarios and current policies, this course equips learners with essential knowledge for further study or careers involving tax-related matters.
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) Mandy,the mayor of Bogart and a strong advocate of a clean downtown,is proposing an increase in the city sales tax from 7% to 50% on all packs of chewing gum purchased in Bogart.Based on the current gum sales,Mandy estimates that this tax will actually reduce the tax revenue on gum sales.What type of forecasting is Mandy using to derive her tax revenue estimates? What "effect" is her estimate based on? Does this necessarily imply that Mandy will be happy given her desire to have a clean downtown?
Answer: Mandy's forecast is based on dynamic forecasting (i.e.,she is considering how taxpayers may alter their activities in response to the tax law change).Given that Mandy is projecting a decrease in tax revenues,her estimates must be based on the substitution effect - i.e.,taxpayers are likely to substitute nontaxable activities (e.g.,simply not purchase gum)for taxable purchases.The decreased tax revenue from gum sales does not necessarily imply that Mandy will achieve a cleaner city as taxpayers may simply buy their gum outside the city.This will depend on how close the city is to other towns/neighborhoods that do not impose the high gum tax.
Q2) A common example of an employment related tax is the Medicare tax.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Tax Compliance, the Irs, and Tax Authorities
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Q1) Which of the following has the highest authoritative weight?
A)Text book.
B)Private letter ruling.
C)Revenue ruling.
D)Tax service.
E)Tax article.
Answer: C
Q2) Leslie made a mathematical mistake in computing her tax liability.Which audit program will likely catch Leslie's mistake?
A)DIF System.
B)Mathematical correction.
C)Document perfection.
D)Information matching.
E)None of the choices are correct.
Answer: C
Q3) For fraudulent tax returns,the statute of limitations for IRS assessment is ten years.
A)True
B)False
Answer: False
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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) If Thomas has a 40% tax rate and a 6% after-tax rate of return,$50,000 of income in five years will cost him how much tax in today's dollars? Use Exhibit 3.1.(Round present and future value amounts to 3 places)
A)$50,000.
B)$20,000.
C)$37,350.
D)$14,940.
E)None of the choices are correct.
Answer: D
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Chapter 4: Individual Income Tax Overview dependents and Filing Status
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Q1) If an unmarried taxpayer provides more than half the support for a cousin who lives in the taxpayer's home for the entire year,the taxpayer will qualify for head of household filing status.
A)True
B)False
Q2) Bonnie and Ernie file a joint return.Bonnie works and receives income during the year but Ernie does not.If the couple files a joint tax return,Ernie is responsible for paying any taxes due if Bonnie is unable to pay the taxes.
A)True
B)False
Q3) When determining whether a child meets the qualifying child support test for the parents,scholarships earned by the child do not count as self-support provided by the child.
A)True
B)False
Q4) To determine filing status,a taxpayer's marital status is determined on January 1 of each tax year in question.
A)True
B)False
6
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Chapter 5: Gross Income and Exclusions
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Q1) Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share)at the time she started working when the stock price was $14 per share.Now that the share price is $20 per share,she exercises all of her options.How much income will Hazel recognize on the exercise date and how much tax will she pay assuming her marginal tax rate is 24 percent?
Q2) This year Ed celebrated his 25 year as an employee of Designer Jeans Company.In recognition of his long and loyal service,the company awarded Ed a gold watch worth $250 and a $2,000 cash bonus.What amount must Ed include in his gross income?
A)$2,250
B)$2,000
C)$250
D)Zero if Ed offers to contribute his watch and bonus to a qualified charity
E)Zero - all employee awards are excluded from gross income
Q3) The principle of realization for tax purposes is very different from realization as it is understood for financial reporting purposes.
A)True
B)False
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Page 7
Chapter 6: Individual for Agi Deductions
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Q1) Lewis is an unmarried law student at State University,a qualified educational institution.Last year Lewis borrowed $30,000 and used the proceeds to pay his university tuition.This year Lewis paid $1,500 of interest on the loan.Which of the following is a true statement if Lewis reports $40,000 of salary and no other items of income or expense?
A)Lewis can deduct all the interest on his student loan for AGI.
B)Lewis can deduct all the interest on his student loan as an itemized deduction.
C)Lewis can only deduct $1,000 of the interest on his student loan for AGI.
D)Lewis can only deduct $1,000 of the interest on his student loan as an itemized deduction.
E)All of the choices are false.
Q2) All investment expenses are itemized deductions.
A)True
B)False
Q3) Passive losses that exceed passive income are deferred until the taxpayer generates passive income to offset these passive losses.
A)True
B)False
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Chapter 7: Individual Income Tax Computation and Tax Credits
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Q1) A marriage penalty occurs when a couple pays more taxes by filing a joint tax return than they would have paid had they filed married filing separate returns.
A)True
B)False
Q2) Persephone has a regular tax liability of $12,475 and a tentative minimum tax of $11,500.Given just this information,what is her alternative minimum tax liability for the year?
A)$0
B)$11,500
C)$975
D)$12,475
Q3) In 2018,John (52 years old)files as a head of household with one 18-year old dependent (qualifying)child.John is eligible to claim a $700 American opportunity credit for the year.John did not have any taxes withheld by his employer during the year and he did not make any estimated tax payments.After taking credits into account,what is the amount of John's taxes payable or refund assuming that his AGI is $26,000 (all from salary)and his taxable income is $8,000?
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Page 9
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) Illegal bribes and kickbacks are not deductible as business expenses but fines imposed by a governmental unit are deductible as long as the fines are incurred in the ordinary course of business.
A)True
B)False
Q3) Shadow Services uses the accrual method and reports on a calendar year.This year Shadow agreed to a uniform cleaning contract with Odie Cleaning.Under the contract Odie bills Shadow for cleaning services as the services are provided.At year end Shadow paid Odie $2,350 for the services rendered during the year.In addition,Shadow paid Odie $700 for cleaning services expected in January of next year.What amount,if any,can Shadow deduct for the cleaning services this year?
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Page 10
Chapter 9: Property Acquisition and Cost Recovery
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Q1) If a machine (seven-year property)being depreciated using the half-year convention is disposed of during the seventh year,a taxpayer must multiply the appropriate depreciation percentage from the MACRS table percentage by 50 percent to calculate the depreciation expense properly.
A)True
B)False
Q2) Depletion is the method taxpayers use to recover their capital investment in natural resources.
A)True
B)False
Q3) Daschle LLC completed some research and development during June of the current year.The related costs were $60,000.If Daschle wants to capitalize and amortize the costs as quickly as possible,what is the total amortization expense Daschle may deduct during the current year?
A)$0.
B)$6,500.
C)$7,000.
D)$12,000.
E)None of the choices are correct.
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Chapter 10: Property Dispositions
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Q1) Unrecaptured §1250 gains apply only to individuals.
A)True
B)False
Q2) The amount realized is the sale proceeds less the adjusted basis.
A)True
B)False
Q3) The sale of machinery at a loss that was used in a trade or business and held for more than one year results in the following type of loss?
A)Capital.
B)§291.
C)§1231.
D)§1245.
E)None of the choices are correct.
Q4) §1250 recaptures the excess of accelerated depreciation over straight-line depreciation on real property placed in service before 1987 as ordinary income.
A)True
B)False
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Chapter 11: Entities Overview
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Q1) Entities taxed as partnerships can use special allocations to reward owners based on their responsibilities,contributions,and individual needs.
A)True
B)False
Q2) Which legal entity provides the least flexible legal arrangement for owners?
A)Corporation.
B)LLC.
C)Partnership.
D)Sole Proprietorship.
Q3) Which of the following legal entities file documents with the state to be formally recognized by the state?
A)Limited Liability Company.
B)General Partnership.
C)Sole Proprietorship (non LLC).
D)None of the choices are correct.
Q4) Beginning in 2018,C corporations are no longer subject to double taxation.
A)True
B)False
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Chapter 12: Corporate Formations and Operations
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Q1) TrendSetter Inc.paid $50,000 in premiums for life insurance coverage for its key employees.What is the nature of the book-tax difference created by this expense?
A)Permanent; favorable.
B)Permanent; unfavorable.
C)Temporary; favorable.
D)Temporary; unfavorable.
Q2) By default,an affiliated group must file a consolidated tax return.
A)True
B)False
Q3) Which of the following statements regarding capital gains and losses is false?
A)In terms of tax treatment,corporations generally prefer capital gains to ordinary income.
B)Like individuals,corporations can deduct $3,000 of net capital losses against ordinary income in a given year.
C)Corporations can carryback net capital losses three years and they can carry them forward for five years.
D)Corporations must apply capital loss carrybacks and carryovers in a particular order.
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Page 14
Chapter 13: Corporate Nonliquidating and Liquidating
Distributions
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Q1) Comet Company is owned equally by Pat and his sister Pam,each of whom hold 100 shares in the company.Comet redeems 50 of Pam's shares on December 31,year 1,for $1,000 per share in a transaction that Pam treats as an exchange for tax purposes.Comet has total E&P of $250,000 on December 31,year 1.What are the tax consequences to Comet as a result of the stock redemption?
A)No reduction in E&P as a result of the exchange.
B)A reduction of $50,000 in E&P as a result of the exchange.
C)A reduction of $62,500 in E&P as a result of the exchange.
D)A reduction of $125,000 in E&P as a result of the exchange.
Q2) Sweetwater Corporation declared a stock dividend to all common stock shareholders of record on December 31,year 1.Shareholders will receive 1 share of Sweetwater common stock for each 5 shares of common stock they already own.Pierre Dorgan owns 500 shares of Sweetwater common stock with a tax basis of $150 per share.The fair market value of the Sweetwater common stock was $90 per share on December 31.What is Pierre's income tax basis in his new and existing common stock in Sweetwater,assuming the distribution is non-taxable?
Q3) The term "earnings and profits" is well-defined in the Internal Revenue Code.
A)True
B)False
Page 15
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Chapter 14: Forming and Operating Partnerships
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Q1) Adjustments to a partner's outside basis are made annually to prevent double taxation on the sale of a partnership interest or at the time of a partnership distribution.
A)True
B)False
Q2) 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.
Q3) A general partner's share of ordinary business income is similar to investment income; thus,a general partner only includes their guaranteed payments as self-employment income.
A)True
B)False
Q4) Partnerships tax rules incorporate both the entity and aggregate approaches.
A)True
B)False
Q5) What is the difference between a partner's tax basis and at-risk amount?
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Chapter 15: Dispositions of Partnership Interests and Partnership Distributions
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Q1) The purpose of hot asset rules is to ensure that selling partners recognize all gain or loss on the sale of their partnership interests as capital.
A)True
B)False
Q2) Catherine is a 30% partner in the ACW Partnership with an outside basis of $20,000.ACW distributes land with a basis of $12,000 and fair value of $18,000 to Catherine in complete liquidation of her interest.Catherine recognizes a capital loss of $2,000 on the distribution.
A)True
B)False
Q3) In an operating distribution,when a partnership distributes property other than money with a basis that exceeds the partner's outside basis,the partner assigns a carryover basis to the distributed asset and recognizes a gain.
A)True
B)False
Q4) Hot assets include assets except cash,capital assets and §1231 assets.
A)True
B)False
Page 17
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Chapter 16: S Corporations
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Q1) Which of the following is not a true statement?
A)For shareholder-employees who own 2 percent or less of the entity,the S corporation gets a tax deduction for qualifying fringe benefits,and the benefits are nontaxable to the employees.
B)For shareholder-employees who own more than 2 percent of the S corporation,the S corporation gets a tax deduction,but the otherwise qualifying fringe benefits are taxable to the more-than-2-percent shareholder-employees.
C)S corporation owners have a tax incentive to pay themselves a low salary.
D)An S corporation shareholder's allocable share of ordinary business income (loss)is not classified as self-employment income for tax purposes.
E)None of the choices are false.
Q2) Bobby T (95% owner)would like to elect S corporation status for DJ,Inc.but Dallas (5% owner)does not want to elect S corporation status.Bobby T cannot elect S status for DJ,Inc.without Dallas' consent.
A)True
B)False
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Chapter 17: Individual From Agi Deductions
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Q1) Which of the following is a true statement?
A) The deduction of cash contributions to public charities is limited to 30 percent of AGI.
B) The deduction of capital gain property to private nonoperating foundations is limited to 50 percent of AGI.
C) The deduction of capital gain property to public charities is limited to 20 percent of AGI.
D) The deduction of cash contributions to private nonoperating foundations is limited to 30 percent of AGI.
E) None of the choices are true.
Q2) Which of the following is a true statement?
A) Taxpayers may only deduct interest on up to $1,500,000 of home acquisition indebtedness.
B) Taxpayers may deduct interest on up to $1,000,000 of home-equity debt.
C) The deduction for investment interest expense is not subject to limitation.
D) A taxpayer who incurs acquisition indebtedness in 2018 may only deduct interest on up to $750,000 of home acquisition indebtedness.
E) None of the choices are true.
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