Legal Environment of Taxation Exam Review
Course Introduction
The Legal Environment of Taxation explores the regulatory, statutory, and judicial framework governing tax laws and their application in business and individual contexts. This course examines federal, state, and local taxation systems, focusing on the rights and responsibilities of taxpayers, the roles of administrative agencies like the IRS, and the influence of court decisions on tax practice. Students will analyze relevant statutes, case law, and ethical considerations to understand compliance requirements and the legal implications of tax planning and controversies. The course provides foundational knowledge for navigating the complex legal landscape of taxation, preparing students for further study or professional practice in tax-related fields.
Recommended Textbook Fundamentals of Taxation 2018 Edition 11th Edition by Ana M. Cruz Dr
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1680 Verified Questions
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Chapter 1: Introduction to Taxation, the Income Tax
Formula, and Form 1040EZ
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Sample Questions
Q1) One of the criteria to file a Form 1040EZ is that the total taxable income of the taxpayer cannot exceed $100,000.
A)True
B)False
Answer: True
Q2) Which of the following would disqualify a taxpayer from filing a Form 1040EZ?
A)Have total taxable income under $100,000.
B)Be under age 65 and not blind.
C)Have no dependents.
D)Have interest income more than $2,000.
Answer: D
Q3) What is the definition of a proportional tax?
Answer: A proportional tax is a tax where the tax rate remains the same regardless of the tax base.
Q4) Federal tax legislation generally originates in which body?
A)Senate Finance Committee.
B)Supreme Court.
C)Internal Revenue Service.
D)House Ways and Means Committee.
Answer: D
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Chapter 2: Expanded Tax Formula, forms 1040A and 1040, and Basic Concepts
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Q1) The IRS can assess criminal penalties if fraud is found on a tax return.Name and describe at least two of those criminal penalties.
Answer: 1.Any person who willfully attempts to evade or defeat any tax.The charge is a felony punishable by fines of not more than $100,000 or imprisonment of not more than five years or both.
2.Any person who fails to collect,account for,and pay over any tax.The charge is a felony punishable by fines of not more than $10,000 or imprisonment of not more than five years or both.
3.Any person who willfully fails to pay estimated tax or other tax or file a return.The charge is a misdemeanor punishable by fines of not more than $25,000 or imprisonment of not more than one year or both.
Q2) A married couple can file a joint return only if both have earned income.
A)True
B)False
Answer: False
Q3) Personal exemptions are for the taxpayer and spouse.
A)True
B)False
Answer: True
Page 4
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Chapter 3: Gross Income: Inclusions and Exclusions
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Q1) When an individual's marginal ordinary income tax rate is 25% or more and less than 39.60%,the tax rate on qualified dividends is:
A)5%.
B)15%.
C)0%.
D)10%.
Answer: B
Q2) A stock dividend in which a shareholder has the option to receive cash is not taxable.
A)True
B)False
Answer: False
Q3) If Tom,an accountant,agrees to provide accounting services to Fred,a friend,in exchange for Fred fixing Tom's office floor,then:
A)Both of them must report income on their tax returns.
B)Fred must report income on his tax return.
C)Neither Tom nor Fred must report income on their tax returns.
D)Tom must report income on his tax return.
Answer: A
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Page 5
Chapter 4: Adjustments for Adjusted Gross Income
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Q1) Is the self-employed health insurance deduction available to individuals other than self-employed taxpayers? If so,to whom is it available?
Q2) Sumiko files her tax return married filing separately.She has not lived with her husband for over two years.Beginning in January 2017,by court ordered decree,she is to pay her husband $600 per month as separate maintenance.For 2017 how much will she be able to deduct as alimony?
A)$7,200.
B)$3,600.
C)$600.
D)$0.
Q3) For the moving expense distance test,the new job location must be at least 100 miles farther from the taxpayer's old residence than was the old job location. A)True B)False
Q4) For 2017,the maximum amount of deductible student loan interest is $2,500. A)True B)False
Q5) Define each of the following: alimony,child support,and a property settlement.
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Chapter 5: Itemized Deductions
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Q1) Individual taxpayers may carry forward for five years charitable contributions that are not allowed as a deduction in the current year due to the adjusted gross income limitation.
A)True
B)False
Q2) For 2017,high-income taxpayers do not have to forfeit part of their itemized deductions.
A)True
B)False
Q3) Which of the following miscellaneous itemized deductions is not subject to the 2% of adjusted gross income limitation?
A)Unreimbursed employee business expenses.
B)Gambling losses up to the amount of gambling winnings.
C)Union or professional dues and subscriptions.
D)Tax return preparation fees.
Q4) What are four major categories of deductible taxes for individual returns?
Q5) A taxpayer receives a deduction for services rendered to a charitable organization. A)True
B)False
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Chapter 6: Self-Employed Business Income Line 12 of Form
1040 and Schedule C
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Sample Questions
Q1) List and define the criteria for an expenditure to be deductible on Schedule C.
Q2) Katherine earned $100,000 from her job at a local business in 2017.She also had $42,000 in self-employed consulting income.What is the amount of her self-employment tax rounded to the nearest dollar?
A)$0.
B)$4,498.
C)$5,935.
D)$6,426.
Q3) Which of the following statements is false with respect to the standard mileage rate?
A)The standard mileage rate encompasses depreciation.
B)The taxpayer can have an unlimited number of autos and use the mileage rate.
C)Section 179 cannot be used on a standard mileage rate auto.
D)The standard mileage rate cannot be used on a taxi.
Q4) §179 expense is available for all of the following business assets except:
A)Bulldozer.
B)Phone system.
C)Apartment complex.
D)Office furniture.
Q5) Describe each of the depreciation conventions and when each is applicable.
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Chapter 7: Capital Gains and Other Sales of Property
Schedule D and Form 4797
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Sample Questions
Q1) Otis bought a 2-unit apartment building in July 2010 for $330,000 and sold it for $400,000 on December 20,2017.At the time of sale there was $83,493 of accumulated straight-line depreciation on the apartment building.Assuming Otis is in the 33% tax bracket,how much of the gain will be taxed at 25%?
A)$0.
B)$70,000.
C)$83,493.
D)$153,493.
Q2) Sara owns an automobile for personal use.The adjusted basis is $13,500 and the FMV is $10,500.Sara has owned the car for two years.
a.Calculate the realized gain (loss)if Sara sells the vehicle for $12,500.
b.Calculate the recognized gain (loss)if Sara sells the vehicle for $12,500.
c.Calculate the realized gain (loss)if Sara sells the vehicle for $15,000.
d.Calculate the recognized gain (loss)if Sara sells the vehicle for $15,000.
Q3) A taxpayer who receives only one form 1099-B from the sales of stock can enter the transaction directly to Schedule D.
A)True
B)False
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Chapter 8: Rental Property, Royalties, and Income From
Flow- Through Entities Line 17, form 1040, and Schedule E
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Q1) Jonathan and Sandy rented their cabin for 123 days and used the cabin for personal use for 55 days.The cabin is considered personal/rental property.
A)True
B)False
Q2) From which of the following flow-through entities is the ordinary income (K-1)considered self-employment income?
A)S corporations
B)Estates
C)Trusts
D)Partnerships
Q3) Royalties can NOT be earned from which of the following:
A)oil wells.
B)patents.
C)coal mines.
D)stocks.
Q4) What are the criteria that determine an amount as capital improvement rather than repair and maintenance expense? What is the proper tax treatment of a capital improvement for rental properties?
Q5) Explain what is considered personal use of a rental property.
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Chapter 9: Tax Credits Form 1040,lines 48 Through 54 and Lines
66A Through 73
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Sample Questions
Q1) Mindy and Xavier have a tax liability of $475 before EIC.Their EIC for the current year is $2,578.What is their total tax refund or tax liability for the current year (assume they have no other credits or additional tax liability)?
A)$0.
B)$475 tax liability.
C)$2,103 tax refund.
D)$2,578 tax refund.
Q2) Thomas and Emma are married,file a joint return,and have three qualifying children.Their AGI was $21,000.What is their EIC?
A)$3,400.
B)$0.
C)$5,616.
D)$6,318.
Q3) Juliann reported foreign income tax of $1,000 on foreign income of $8,000.Her worldwide taxable income was $89,000 and her U.S.tax liability was $23,000.What is the amount of foreign tax credit she is allowed? Briefly explain your answer.
Q4) Name the two credits that are available as education credits and briefly discuss the criteria to claim the credits.
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Chapter 10: Payroll Taxes
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Q1) What form is given to an employee to correct incorrect payroll information?
A)W-2C.
B)W-4.
C)W-9.
D)None.The employee notifies the IRS directly when he or she files a Form 1040.
Q2) Form 1040-ES is filed along with the Form 1040 when a taxpayer makes estimated payments during the year.
A)True
B)False
Q3) Employers are required to deposit FUTA taxes when their liability exceeds:
A)$100.
B)$500.
C)$1,000.
D)$2,500.
Q4) GTW Inc. ,did not make timely deposits for SUTA purposes and its state wages subject to SUTA and FUTA were $289,000.Assume the wage limit was reached prior to July 1,2017.
a.Calculate the amount of tax due on the 940.
b.How much would the FUTA tax have been if GTW made timely deposits to its state fund?
Page 12
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Chapter 11: Retirement and Other Tax-Deferred Plans and Annuities
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Q1) Mark is single and must start taking distributions from his traditional IRA beginning April 1,2017.At the end of 2016 when Mark was 71 years old,the IRA had a balance of $110,000.What amount must Mark take as a distribution from the IRA by April 1,2017?
A)$4,151.
B)$4,297.
C)$6,748.
D)$7,190.
Q2) Individuals who make contributions to a Coverdell Education Savings Account must have AGI of $175,000 or less.
A)True
B)False
Q3) If only one spouse is employed,and that spouse is not covered under an employer-sponsored retirement plan,then the non-working spouse can make a deductible contribution to his or her own IRA.
A)True
B)False
Q4) Under what circumstances might an individual want to establish an annuity contract in retirement?
Page 13
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Chapter 12: Special Property Transactions
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Q1) On June 15,2017,Roco sold land held for investment to Scotty for $100,000 cash and an installment note of $500,000 payable in five equal annual installments beginning on June 15,2018,plus interest at 10%.Roco's basis in the land is $300,000.What amount of gain is recognized in 2017 under the installment method?
Q2) Gain realized on a like-kind exchange is excluded from income in all of the following circumstances except:
A)When boot is given.
B)When boot is received.
C)When a liability is assumed.
D)Both when boot is received and when a liability is assumed.
Q3) The exchange of a 5-year class asset for a 7-year class asset would not qualify for "like-kind" treatment.
A)True
B)False
Q4) Taxpayers are required to use the installment method for deferred payments unless the taxpayer elects not to use the installment method.
A)True
B)False
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Page 14
Chapter 13: At-Riskpassive Activity Loss Rules and the
Individual Alternative Minimum Tax
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Q1) Jordan purchased a warehouse for $600,000.$100,000 of the cost was properly allocated to the land.
a.If the property was purchased in April of 1998,what is the AMT depreciation adjustment required in 2017?
b.If the property was purchased in April of 2017,what is the AMT depreciation adjustment required in 2017?
Q2) Denise's AGI is $145,000 before considering her single rental property.During the year,Denise had a rental loss of $13,000.What is Denise's AGI after considering the rental loss?
A)$122,500.
B)$132,000.
C)$142,500.
D)$145,000.
Q3) Which of the following increases the taxpayer's at-risk amount?
A)A taxpayer's share of recourse liabilities.
B)A taxpayer's share of qualified nonrecourse liabilities.
C)A taxpayer's share of nonrecourse liabilities.
D)Both a taxpayer's share of recourse liabilities and a taxpayer's share of qualified nonrecourse liabilities.
Page 15
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Chapter 14: Partnership Taxation
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Sample Questions
Q1) Lacy contributes the following assets to a partnership for a 25% interest: \(\begin{array}{lllll}&\text { Lacy's Basis }&FMV\\
\text { Land } & \$ 15,00 C & \$ 50,000 \\
\text { Van } & \$ 10,00 C & \$ 15,000\\
\text { Total }&\$25,000&\$65,000
\end{array}\) The land and the van have a basis to the partnership of:
A)Land $0;Van $0.
B)Land $15,000;Van $10,000.
C)Land $15,000;Van $15,000.
D)Land $50,000;Van $15,000.
Q2) Molly has a $15,000 basis in her partnership interest when she receives a liquidating distribution from the partnership.Molly receives cash of $6,000.What is Molly's recognized gain or loss on the liquidating distribution?
A)$0.
B)($6,000).
C)($9,000).
D)($15,000).
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Page 16
Chapter 15: Corporate Taxation
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Q1) Andre formed a corporation and owns all the stock.He contributed property with a FMV of $10,000 and a basis of $7,000 and he received $1,000 cash from the corporation.Andre's basis in his stock is:
A)$7,000.
B)$8,000.
C)$10,000.
D)Some other number.
Q2) Benedict transfers land with a FMV of $900,000 to a newly-formed corporation in exchange for all of the stock.The land has a basis of $500,000 and debt of $300,000.The basis of the land,in the hands of the corporation is:
A)$300,000.
B)$400,000.
C)$500,000.
D)$900,000.
Q3) Corporations with total receipts and total assets less than $250,000 are not required to complete Schedule L or Schedule M-1.
A)True
B)False
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