Introduction to Taxation Exam Questions

Course Introduction

Introduction to Taxation provides students with a foundational understanding of tax systems, principles, and policies as they apply to individuals and businesses. The course explores the objectives and structure of modern tax systems, the basic principles behind tax law, the different types of taxes (such as income, sales, and property taxes), and their implications for decision-making. Students will analyze how taxes are legislated, administered, and enforced, developing an appreciation for the ethical, social, and economic considerations involved in taxation. Real-world examples and introductory calculations are integrated to strengthen comprehension and application in both personal and professional contexts.

Recommended Textbook

Concepts in Federal Taxation 2019 26th Edition Kevin E. Murphy

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2071 Verified Questions

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Chapter 1: Federal Income Taxation-An Overview

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Q1) Heidi and Anastasia are residents of the mythical country of Wetland. Heidi pays $1,500 income tax on taxable income of $6,000. Anastasia pays income tax of $21,000 on taxable income of $72,000. The income tax structure is

I.Progressive.

II.Proportional.

III.Regressive.

IV.Value-added.

V.Marginal.

A)Only statement I is correct.

B)Only statement II is correct.

C)Only statement III is correct.

D)Only statement V is correct.

E)Statements II and IV are correct.

Answer: A

Q2) All tax practitioners are governed by the AICPA's Code of Professional Conduct. A)True

B)False

Answer: False

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Chapter 2: Income Tax Concepts

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Q1) Related party

A)Taxpayer reports income when received in cash or its equivalent and takes deductions as they are paid.

B)A deduction taken in one year that is recovered in a later year is reported as income in the year of recovery to the extent that the deduction reduced taxable income.

C)Taxpayer reports income as earned and deductions as incurred.

D)The result of an arms-length transaction.

E)Exclusions and deductions result from specific acts of Congress that must be strictly applied and interpreted.

F)The taxability of a transaction is determined by the reality of the transaction rather than some contrived appearance.

G)The reporting of an item of income or expense on a tax return

H)No income is realized until the taxpayer's invested capital is recovered.

I)All income received is taxable unless some specific provision of the tax law allows exclusion of the item.

J)These taxpayers are not deemed to transact at arms-length.

Answer: J

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Chapter 3: Income Sources

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Q1) The holding period for receiving long-term capital gain treatment is more than 12 months.

A)True

B)False

Answer: True

Q2) Meredith, age 14, earns wages of $2,100 from her modeling. Since the funds are collected by Meredith's father and used for some of Meredith's living expenses, her father intends to include it in his gross income.

I.The person that actually earns the income will recognize it, Meredith in this case.

II.The Assignment of Income Doctrine prohibits the father from recognizing the $2,100.

A)Only statement I is correct.

B)Only statement II is correct.

C)Both statements are correct.

D)Neither statement is correct.

Answer: C

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Chapter 4: Income Exclusions

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Q1) Clarance rented office space to an attorney who left town before the lease was completed. The attorney left several bookcases and other improvements to cover the remaining rent. Clarance must include in income the value of the leasehold improvements to the extent of the remaining rent that was due.

A)True

B)False

Q2) Dick lives rent-free in an apartment (value $675/month) in a complex where he is the apartment manager and must be on the premises to handle problems.

A)Fully excluded from gross income.

B)Fully included in gross income.

C)Partially excluded from gross income.

Q3) No-additional-cost services and employee discounts must be made available to employees on a nondiscriminatory basis and must also be in the same line of business in which the employee works to be excluded from the employee's income.

A)True

B)False

Q4) What are the differences between a cafeteria plan and a flexible benefits (salary reduction) plan?

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Chapter 5: Introduction to Business Expenses

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Q1) Profit motivated business expenses

A)Automobile used 75% for business.

B)Investment interest expense on loan to acquire municipal bonds.

C)Cost of investigating a new trade or business that the taxpayer enters.

D)Can be separated into two classifications.

E)Expenses related to royalty income

F)Expenditure to influence legislation.

G)Cost of a new roof for office building.

H)Relates to an income producing activity mainly carried on for recreation or personal enjoyment.

I)Deductibility depends on income and amount of personal and rental use.

J)Deductibility depends on whether the area is used exclusively for trade or business activities.

Q2) A taxpayer can take a deduction for a portion of his phone bill if he is eligible for the home office deduction.

A)True

B)False

Q3) Explain the rationale for disallowing the deduction for interest expense attributable to money borrowed to acquire tax-exempt municipal bonds.

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Chapter 6: Business Expenses

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Q1) For each of the following situations explain why the expenditure is or is not deductible and any limitations that may be placed on the amount of the deduction.

a.Ellis is a part-time bookkeeper for Gilmore Company. The owner of Gilmore told Ellis that if he earns an accounting degree and passes the CPA exam, he would hire him as Gilmore's accountant. Ellis spends $5,600 taking classes towards an accounting degree at City College.

b.Harry owns Circus City Condiments, a wholesaler of circus food. In 2012, he loaned his friend Joanna $8,000 at 6% annual interest with the balance due in 5 years. Joanna used the loan to open a beauty salon. In December 2017, Joanna tells Harry that she has filed for bankruptcy and that he will be lucky to get $2,000 of his money back. The bankruptcy proceedings had not been completed at the end of 2017.

c.Audrey is a self-employed computer consultant. Harvey calls Audrey and asks her for information on installing a new Lan-based workstation system in his business. Audrey meets Harvey at Franco's Chop House. They have dinner while Audrey explains how such a system will work and what it will cost. Audrey pays for the dinner, which costs $100. Harvey calls Audrey the next day and tells her that he has decided that the system costs too much and that he will not need her services.

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Chapter 7: Losses-Deductions and Limitations

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Q1) Hubert and Jared are both involved in automobile accidents, which totally destroy their automobiles this year. Hubert and Jared purchased the automobiles at the same time for the same cost, and neither of them receives any insurance reimbursement for the destruction of their automobiles. Before considering the effect of their casualties, Hubert and Jared have identical adjusted gross incomes. Although Hubert and Jared are seemingly alike in every aspect regarding the automobiles, Hubert is allowed a deduction of $2,000 for the destruction of his automobile and Jared is not allowed any deduction for his automobile. What causes this disparity of treatments between Hubert and Jared? Explain. Use examples if necessary.

Q2) Which of the following losses are generally deductible?

I.Loss on the sale of a personal residence.

II.Loss due to the theft of business inventory.

A)Only statement I is correct.

B)Only statement II is correct.

C)Both statements are correct.

D)Neither statement is correct.

Q3) Discuss the difference(s) between the real estate professional exception and the active participation exception when dealing with rental properties.

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Chapter 8: Taxation of Individuals

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Q1) Gross income test

A)Prepaid interest.

B)Either a qualifying child or a qualifying relative

C)One test for a qualifying relative.

D)The minimum amount a taxpayer can deduct for personal expenditures.

E)A deduction in this category is always allowed. That is, there is no minimum allowable amount and generally no income limitation placed on these deductions.

F)Generally, these deductions are for specifically allowed personal expenditures.

G)An exception to this test is a custodial parent.

H)Interest paid on debt used to buy securities.

I)Interest paid on credit cards, personal loans, car loans, etc.

J)Interest paid on a mortgage secured by the taxpayer's residence. The proceeds of the loan are used to pay off a credit card, the interest is not deductible.

k.A tax designed to prevent the shifting of unearned income to children of the taxpayer.

Q2) Discuss why the distinction between deductions for adjusted gross income and deductions from adjusted gross income is important for individual taxpayers.

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Chapter 9: Acquisitions of Property

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Q1) Split basis

A)Begins on the day after acquisition and ends on the day of disposition.

B)The initial investment in an asset.

C)An asset's basis transfers from one owner to another.

D)The capital investment remaining in an asset at the date of its disposition.

E)Sales price less expenses of disposition.

F)A purchase of all of the assets of a business.

G)Amount realized is less than adjusted basis.

H)A purchase of all of the assets of a business by buying the stock of a corporation.

I)A term used to identify a situation in which an asset has a different basis for determining gain than for determining loss.

J)The date of death used to value a decedent's estate in the absence of any special election.

K)Six months after the date of death, used to value a decedent's estate when the executor of the estate makes election.

L)Amount realized is greater than adjusted basis.

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Chapter 10: Cost Recovery on Property: Depreciation, Depletion,

and Amortization

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Q1) During 2018, Witt Processing Corporation places $210,000 of Section 179 property in service for use in its business. What is the amount of Witt Processing's maximum Section 179 deduction for 2018?

A)$210,000

B)$200,000

C)$25,000

D)$105,000

E)$50,000

Q2) Depletion

A)Trucks, and passenger automobiles.

B)Used to recover the investment in intangible assets.

C)Used to recover the investment in long-lived tangible business-use assets.

D)An attempt to stimulate capital investment by small businesses.

E)Used to recover the investment in assets that waste away through extraction.

Q3) Listed property

A)Trucks, and passenger automobiles.

B)Used to recover the investment in intangible assets.

C)Used to recover the investment in long-lived tangible business-use assets.

D)An attempt to stimulate capital investment by small businesses.

Page 12

E)Used to recover the investment in assets that waste away through extraction.

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Chapter 11: Property Dispositions

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Q1) Courtney and Nikki each own investment realty that they would like to trade. Courtney's property is subject to mortgage debt of $10,000, and its appraised fair market value is $25,000. Nikki's property is subject to mortgage debt of $17,000, and its appraised fair market value is $25,000. Courtney and Nikki agree to exchange the properties and assume each other's debt. To complete the exchange, who pays cash and how much will that person have to pay?

A)Courtney pays $15,000.

B)Nikki pays $7,000.

C)Nikki pays $8,000.

D)Courtney pays $7,000.

E)Neither person pays anything.

Q2) Harry sells an apartment building for $117,000. The building was held as an investment, it cost $95,000 and had an basis of $83,000 at the date of the sale. If Harry is in the 32% marginal tax rate bracket without considering the effect of the sale, how much tax is paid on the gain on the sale of the apartment building?

A)$5,100

B)$6,300

C)$7,140

D)$10,880

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Chapter 12: Non-Recognition Transactions

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Q1) Matthew exchanges an investment apartment building for a parcel of land. The apartment building has a fair market value of $80,000 and an adjusted basis of $95,000. The land's value is $60,000. Matthew receives $20,000 cash in the exchange. What is Matthew's recognized gain or (loss) on the exchange and his basis in the land?

\(\begin{array} { c c }

\text { Gain (Loss) Recognized } & \text { Basis } \\\end{array}\)

A) $\begin{array} { c c } &\$ - 0 - &&&&&& \$ 75,000 \\\end{array}$

B) $\begin{array} { c c } &\$ ( 15,000 ) &&&&&& \$ 65,000 \\\end{array}$

C) $\begin{array} { c c } &\$ ( 35,000 ) &&&&&& \$ 85,000 \\\end{array}$

D) $\begin{array} { c c } &\$ 20,000 &&&&&& \$ 30,000 \\\end{array}$

E)$\begin{array} { c c } & \$ 15,000 &&&&&& \$ 35,000 \end{array}$

Q2) Farm land for an office building and its land.

A)qualifies as a like-kind exchange

B)does not qualify as a like-kind exchange

Q3) Land in London, England for land in San Francisco, California.

A)qualifies as a like-kind exchange

B)does not qualify as a like-kind exchange

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Chapter 13: Choice of Business Entity-General Tax and Nontax Factorsformation

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Q1) Clark Exploration Corporation was organized and began operations on October 1, 2018. It incurs $41,000 in legal fees to obtain the corporate charter. The corporation elects to expense its organizational costs over the shortest allowable period. What amount will Clark report for organizational expenses for 2018?

A)$2,050

B)$4,100

C)$5,000

D)$5,600

E)$41,000

Q2) Rockhill Corporation operates a women's clothing boutique. Taxable income for the current year is $60,000. What is Rockhill's income tax liability?

A)$- 0 -

B)$6,000

C)$9,000

D)$12,600

E)$15,000

Q3) Corporations generally are required to use the accrual method of accounting.

A)True

B)False

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Chapter 14: Choice of Business Entity-Operations and Distributions

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Q1) William, a CPA, owns a 75% interest in Burglar Concrete Company (BCC). BCC is organized as a partnership. During the current year, William prepares BCC's tax return and receives his normal $300 fee for the preparation of the return.

I.BCC cannot deduct the $300 fee because of the related party rules.

II.William must recognize the $300 fee as income.

A)Only statement I is correct.

B)Only statement II is correct.

C)Both statements are correct.

D)Neither statement is correct.

Q2) Byron is a partner in the Dowdy Group. At the close of the current year, Byron's basis in the partnership is $34,000. At that time, the partnership distributes cash of $8,000 and property with a basis of $9,000 and a fair market value of $13,000 to each partner. What is Byron's basis in the partnership after the distribution?

A)$13,000

B)$17,000

C)$26,000

D)$34,000

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Chapter 15: Choice of Business Entity-Other Considerations

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Q1) Mary determined her AMTI to be $120,000 for 2018. If her regular income tax liability is $27,000, what is the amount of the alternative minimum tax for 2018?

A)$- 0 -

B)$1,000

C)$4,200

D)$6,600

E)$27,000

Q2) Pension plans are subject to excess contribution penalties. Which of the following are correct:

I.There is an excess contribution penalty for IRAs or Roth IRAs that equal 6% of the amount in excess of $5,500 or the value of the individual's IRA whichever is less.

II.A 10% excess contribution penalty applies to IRAs and Roth IRAs.

A)Only statement I is correct.

B)Only statement II is correct.

C)Both statements are correct.

D)Neither statement is correct.

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Chapter 16: Tax Research

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Q1) An interpretative regulation is issued when Congress specifically delegates the authority to the Treasury Department to write specific rules for a designated Code section.

A)True

B)False

Q2) Which of the following is (are) secondary sources of tax law?

I.Joint Conference Committee Reports.

II.Journal of Taxation

III.Revenue Procedures.

IV.Tax Treaty with France.

V.U.S. Tax Court Memorandum Decisions.

A)Only statement IV is correct.

B)Only statement II is correct.

C)Statements II and III are correct.

D)Statements I, II, III, and V are correct.

E)Statements I, II, III, IV, and V are correct.

Q3) Citators provide the full text of court decisions.

A)True

B)False

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