Introduction to Taxation Solved Exam Questions
Course Introduction
Introduction to Taxation offers students a comprehensive overview of the fundamental principles, concepts, and rules governing taxation systems. The course explores the objectives of taxation, the structure of tax authorities, and the types of taxes imposed at both individual and business levels. Through real-world examples and case studies, students learn about tax compliance, tax planning, and the ethical considerations in tax practice. The curriculum covers income tax, corporate tax, indirect taxes, and the implications of tax policy on the economy and society, preparing students for further study or careers in accounting, finance, and law.
Recommended Textbook
South Western Federal Taxation 2015 Individual Income Taxes 38th 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) Tax credits available for the purchase of a vehicle that uses alternative (non-fossil)fuels.
A)Economic considerations
B)Social considerations
C)Equity considerations
Answer: A
Q2) More than 25% gross income omission and statute of limitations
A)3 years from date return is filed
B)3 years from due date of return
C)20% of underpayment
D)5% per month (25% limit)
E)0.5% per month (25% limit)
F)Conducted at IRS office
G)Conducted at taxpayer's office
H)6 years
I)45-day grace period allowed to IRS
J)No statute of limitations (period remains open)
K)75% of underpayment
L)No correct match provided
Answer: H
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Chapter 2: Working With the Tax Law
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Sample Questions
Q1) Which court decision carries more weight?
A)Federal District Court
B)Second Circuit Court of Appeals
C)U.S.Tax Court decision
D)Small Cases Division of U.S.Tax Court
E)U.S.Court of Federal Claims
Answer: B
Q2) The first codification of the tax law occurred in 1954.
A)True
B)False
Answer: False
Q3) Subchapter D refers to the "Corporate Distributions and Adjustments" section of the Internal Revenue Code.
A)True
B)False
Answer: False
Q4) The Code section citation is incorrect: § 212(1).
A)True
B)False
Answer: False
Page 4
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Chapter 3: Tax Formula and Tax Determination;an
Overview of Property Transactions
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Sample Questions
Q1) Ed is divorced and maintains a home in which he and a dependent friend live.Ed does not qualify for head of household filing status.
A)True
B)False
Answer: True
Q2) Surviving spouse filing status begins in the year in which the deceased spouse died. A)True
B)False Answer: False
Q3) Stealth taxes are directed at lower income taxpayers.
A)True
B)False Answer: False
Q4) Buddy and Hazel are ages 72 and 71 and file a joint return.If they have itemized deductions of $14,600 for 2014,they should not claim the standard deduction. A)True
B)False Answer: False
Page 5
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Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) In some foreign countries,the tax law specifically designates the types of income items that are includible in gross income.How does this approach compare with the U.S.Internal Revenue Code (§ 61)? What is a major advantage to the approach used in the U.S.tax law?
Q2) The purpose of the tax rules that apply to below-market loans between family members is to:
A)Discourage loans between related parties.
B)Prevent shifting of income among family members.
C)Prevent gifts from being disguised as bad debt expenses.
D)Prevent gift tax avoidance.
E)None of these is true.
Q3) Ted earned $150,000 during the current year.He paid Alice,his former wife,$75,000 in alimony.Under these facts,the tax is paid by the person who benefits from the income rather than the person who earned the income.
A)True
B)False
Q4) How does the taxation of Social Security benefits differ from the taxation of an annuity purchased by the taxpayer?
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Page 6
Chapter 5: Gross Income: Exclusions
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Q1) A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for:
A)Only tuition.
B)Tuition,books,and supplies.
C)Tuition,books,supplies,meals,and lodging.
D)Meals and lodging.
E)None of these.
Q2) Carla is a deputy sheriff.Her employer requires that she live in the county where she is employed.Housing is very expensive;so the county agreed to pay her $4,800 per year to cover the higher cost of housing.Carla must include the housing supplement in her gross income.
A)True
B)False
Q3) A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2014.His total itemized deductions in 2014 were $18,000.In 2015,he received a $900 refund of his 2014 state income tax.The taxpayer must include the $900 refund in his 2015 Federal gross income in accordance with the tax benefit rule.
A)True
B)False
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Page 7
Chapter 6: Deductions and Losses: in General
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Sample Questions
Q1) What are the relevant factors to be considered in determining whether an activity is profit-seeking or a hobby?
Q2) Tommy,an automobile mechanic employed by an auto dealership,is considering opening a fast food franchise.If Tommy decides not to acquire the fast food franchise,any investigation expenses are:
A)A deduction for AGI.
B)A deduction from AGI,subject to the 2 percent floor.
C)A deduction from AGI,not subject to the 2 percent floor.
D)Deductible up to $5,000 in the current year with the balance being amortized over a 180-month period.
E)Not deductible.
Q3) Which of the following is not a related party for constructive ownership purposes under § 267?
A)The taxpayer's aunt.
B)The taxpayer's brother.
C)The taxpayer's grandmother.
D)A corporation owned more than 50% by the taxpayer.
E)None of these.
Q4) Are there any circumstances under which lobbying expenditures are deductible?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) A bona fide debt cannot arise on a loan between father and son.
A)True
B)False
Q2) Alma is in the business of dairy farming.During the year,one of her barns was completely destroyed by fire.The adjusted basis of the barn was $90,000.The fair market value of the barn before the fire was $75,000.The barn was insured for 95% of its fair market value,and Alma recovered this amount under the insurance policy.Alma has adjusted gross income for the year of $40,000 (before considering the casualty).Determine the amount of loss she can deduct on her tax return for the current year.
A)$3,750
B)$14,650
C)$14,750
D)$18,750
E)None of these
Q3) A nonbusiness bad debt deduction can be taken any year after the debt becomes totally worthless.
A)True
B)False
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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Sample Questions
Q1) On April 15,2014,Sam placed in service a storage facility (a single-purpose agricultural structure)costing $80,000.Sam also purchased and planted fruit trees costing $40,000.Sam does not elect to expense any of the acquisitions under § 179 and he elects not to take additional firstyear depreciation (if available).Determine Sam's cost recovery from these two items for 2014.
Q2) George purchases used sevenyear class property at a cost of $200,000 on April 20,2014.Determine George's cost recovery deduction for 2014 for alternative minimum tax purposes,assuming George does not elect § 179.
A)$2,500
B)$10,000
C)$14,280
D)$28,580
E)None of these
Q3) If an automobile is placed in service in 2014,the limitation for cost recovery in 2016 will be based on the cost recovery limits for the year 2014.
A)True
B)False
Q4) Discuss the reason for the inclusion amount with respect to leased automobiles.
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) Nondeductible moving expense
A)Must involve the same trade or business
B)Must be for the convenience of the employer
C)Meals while in route
D)Lodging while in route
E)Out-of-town job assignment lasts for more than one year
F)Can include actual cost of parking
G)Payment for services rendered based on tasks performed
H)Excludes use of MACRS depreciation
I)Taxpayer has tools and helper provided for him
J)Transportation must be allocated if taxpayer spends two weeks on business and one week sightseeing
K)Paralegal obtains a law degree
L)Correct match not provided
Q2) Meg teaches the fifth grade at a local school.During the year,she spends $1,200 for school supplies for use in her classroom.On her income tax return,some of this expense is not reported and the balance is deducted in two different places.Explain what has probably happened.
Q3) In terms of income tax treatment,what is the difference between common law and statutory employees?
Page 11
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) During 2014,Hugh,a self-employed individual,paid the following amounts: Real estate tax on Iowa residence $3,800
State income tax 1,700
Real estate taxes on land in Puerto Rico (held as an investment)1,100 Gift tax paid on gift to daughter 1,200
State sales taxes 1,750
State occupational license fee 300 Property tax on value of his automobile (used 100% for business)475
What is the maximum amount Hugh can claim as taxes in itemizing deductions from AGI?
A)$6,600
B)$6,650
C)$7,850
D)$8,625
E)None of these
Q2) Tom,whose MAGI is $40,000,paid $3,500 of interest on a qualified student loan in 2014.Tom is single.He may deduct the $3,500 interest as an itemized deduction. A)True B)False
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Chapter 11: Investor Losses
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Q1) Josh 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 $100,000 in the current year.At the beginning of this year,Josh's atrisk amounts in Activities A and B are $10,000 and $100,000,respectively.What is the amount of Josh's suspended passive loss with respect to these activities at the end of the current year?
A)$0
B)$36,000
C)$40,000
D)$100,000
E)None of these
Q2) Sarah purchased for $100,000 a 10% interest in a business venture that is not subject to the passive activity rules.During the first year,her share of the entity's loss was $120,000.At the beginning of the second year,the entity obtained $800,000 of recourse financing.During the second year,Sarah withdrew cash of $20,000,and her share of the entity's loss was $25,000.Calculate the amount of loss that Sarah may claim in each of the two years and determine her at-risk amount at the end of each year.
Q3) Describe the general rules that limit the deduction of investment interest expense. To view all questions and flashcards with answers, click on the resource link above.
13
Chapter 12: Alternative Minimum Tax
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Q1) Paul incurred circulation expenditures of $180,000 in 2014 and deducted that amount for regular income tax purposes.Paul has a $60,000 negative AMT adjustment for 2015,2016,and for 2017.
A)True
B)False
Q2) Identify an AMT adjustment that applies for the individual taxpayer that does not apply for the corporate taxpayer and identify an AMT adjustment that applies for the corporate taxpayer that does not apply for the individual taxpayer.
Q3) Tad and Audria,who are married filing a joint return,have AMTI of $256,000 for 2014.Calculate their AMT exemption.
Q4) If the taxpayer elects to capitalize intangible drilling costs and to amortize them over a 3-year period for regular income tax purposes,there is no adjustment or preference for AMT purposes.
A)True
B)False
Q5) Under what circumstances are corporations exempt from the AMT?
Q6) What is the relationship between taxable income and AMTI?
Q7) Why is there a need for a second tax system called the alternative minimum tax?
Page 14
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Chapter 13: Tax Credits and Payment Procedures
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Q1) The tax benefits resulting from tax credits and tax deductions are affected by the tax rate bracket of the taxpayer.
A)True
B)False
Q2) Which of the following issues does not need resolution in an employer's effort to comply with employment tax payment requirements?
A)Ascertaining which employees and wages are covered by employment taxes and are subject to withholding for income taxes.
B)Arriving at the amount to be paid and/or withheld.
C)Reporting and paying employment taxes and income taxes withheld to the IRS on a timely basis through the use of proper forms.
D)Each of the above issues needs to be resolved.
E)None of these is relevant to the employer.
Q3) A LIFO method is applied to general business credit carryovers,carrybacks,and utilization of credits earned during a particular year.
A)True
B)False
Q4) Discuss the treatment of unused general business credits.
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Page 15
Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Q1) Ed and Cheryl have been married for 27 years.They own land jointly with a basis of $300,000.Ed dies in 2014,when the fair market value of the land is $500,000.Under the joint ownership arrangement,the land passed to Cheryl.
a.If Ed and Cheryl reside in a community property state,what is Cheryl's basis in the land?
b.If Ed and Cheryl reside in a common law state,what is Cheryl's basis in the land?
Q2) Karen owns City of Richmond bonds with a face value of $10,000.She purchased the bonds on January 1,2014,for $11,000.The maturity date is December 31,2023.The annual interest rate is 8%.What is the amount of taxable interest income that Karen should report for 2014,and the adjusted basis for the bonds at the end of 2014,assuming straight-line amortization is appropriate?
A)$0 and $11,000
B)$0 and $10,900
C)$100 and $11,000
D)$100 and $10,900
E)None of these
Q3) Why is it generally undesirable to pass property by death when its fair market value is less than basis?
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Page 16
Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) Fran was transferred from Phoenix to Atlanta.She sold her Phoenix residence (adjusted basis of $250,000)for a realized loss of $50,000 and purchased a new residence in Atlanta for $375,000.Fran had owned and lived in the Phoenix residence for 6 years.What is Fran's recognized gain or loss on the sale of the Phoenix residence and her basis for the residence in Atlanta?
A)$0 and $375,000.
B)$0 and $425,000.
C)($50,000)and $325,000.
D)($50,000)and $375,000.
E)None of these.
Q2) Liz,age 55,sells her principal residence for $600,000.She purchased it twenty-two years ago for $175,000.Selling expenses are $30,000 and repair expenses to get the house in a marketable condition to sell are $15,000.Liz's objective is to minimize the taxes she must pay associated with the sale.Calculate her recognized gain.
Q3) What kinds of property do not qualify under the like-kind provisions?
Q4) What types of exchanges of insurance contracts are eligible for nonrecognition treatment under § 1035?
Q5) Define an involuntary conversion.
Q6) Discuss the treatment of losses from involuntary conversions.
Page 17
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) The tax law requires that capital gains and losses be separated from other types of gains and losses because there are limitations on the deduction of net capital losses.
A)True
B)False
Q2) An individual taxpayer received a valuable painting from his uncle,a famous painter.The painter created the painting.After the taxpayer held the painting for two years,he sold it for a $400,000 gain.The gain is a long-term capital gain.
A)True
B)False
Q3) A franchisor licenses its mode of business operation to a franchisee.
A)True B)False
Q4) If a capital asset is sold at a gain,the holding period is important. A)True B)False
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18
Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Q1) Describe the circumstances in which the maximum unrecaptured § 1250 gain (25% gain)does not become part of the Schedule D netting process for an individual taxpayer?
Q2) The following assets in Jack's business were sold in 2014: \(\begin{array}{lll}\text { Asset } &\text { Holding Period }&\text { Gain/(Loss) }\\ \text { Office Equipment } & 6 \text { years } & \$ 1,100 \\ \text { Automobile } & 8 \text { months } & (\$ 800) \\ \text { ABC Stock (capital asset) } & 2 \text { years } & \$ 1,400 \end{array}\) The office equipment had a zero adjusted basis and was purchased for $8,000. The automobile was purchased for $2,000 and sold for $1,200. The ABC stock was purchased for $1,800 and sold for $3,200. In 2014 (the year of sale), Jack should report what amount of net capital gain and net ordinary income?
A) $1,700 LTCG.
B) $600 LTCG and $300 ordinary gain.
C) $1,400 LTCG and $300 ordinary gain.
D) $2,500 LTCG and $800 ordinary loss.
E) None of these.
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Chapter 18: Accounting Periods and Methods
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Q1) The installment method applies where a payment will be received after the tax year of the sale:
A)By an investor who sold real estate at a gain.
B)By an investor who sold real estate at a loss.
C)By an appliance dealer who sold inventory at a gain.
D)By an investor who sold IBM Corporation common stock at a gain.
E)None of these.
Q2) For a taxpayer who is required to use the percentage of completion method,the taxpayer can elect to defer the recognition of income and the related costs until the taxable year in which cumulative contract costs are at least 10 percent of the estimated contract costs.
A)True
B)False
Q3) A manufacturer must capitalize the following costs relative to inventories:
A)Only I.
B)Only I and II.
C)Only II and III.
D)I,II,and III.
E)None of these.
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Chapter 19: Deferred Compensation
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Q1) Larry negotiates a $2.5 million contract with Red,Inc. ,a publicly-held corporation that receives TARP funds,to become their CEO for 2014.What amount is deductible by Red,Inc. ,in 2014?
A)$0
B)$1,000,000
C)$2,064,000
D)$2,500,000
E)None of these
Q2) A defined benefit plan must reduce the $210,000 (in 2014)maximum benefits payable by one-tenth for each year of participation under 10 years that an employee has performed.
A)True
B)False
Q3) Which statement is true with respect to golden parachute payments?
A)Refers to excess severance pay.
B)Does not include payments from a qualified profit sharing plan.
C)A deduction is denied to the employer.
D)A 20% excise tax is imposed on the recipient.
E)All of these are true.
Q4) Compare a § 401(k)plan with an IRA.
Page 21
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Chapter 20: Corporations and Partnerships
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Q1) Recapture of depreciation on real property can be more severe.
A)Applies only to the income taxation of individuals
B)Applies only to the income taxation of C corporations
C)Applies to both the income taxation of individuals and of C corporations
D)Applies to neither the income taxation of individuals nor of C corporations
Q2) If the basis of a partnership interest is exhausted,a partner can use loans made to the partnership to absorb excess losses.
A)True
B)False
Q3) How does the domestic production activities deduction differ for corporations than for individuals?
Q4) In computing the NOL of a corporation,the dividends received deduction cannot be claimed.
A)True
B)False
Q5) The holding period to the partnership of property contributed by a partner includes the period during which the property was held by the contributing partner.
A)True
B)False
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