Principles of Federal Income Tax Exam Questions
Course Introduction
Principles of Federal Income Tax provides an introduction to the fundamental concepts and rules governing the taxation of individuals and entities under the federal income tax system. The course explores the sources of tax law, the identification and calculation of gross income, allowable deductions, tax credits, and the determination of tax liability. Students also examine topics such as filing status, tax accounting methods, and the policy rationales behind tax rules. Emphasis is placed on understanding the Internal Revenue Code, IRS regulations, and judicial interpretations, equipping students with a foundational understanding applicable to both legal practice and financial decision-making.
Recommended Textbook
South Western Federal Taxation 2017 Individual Income Taxes 40th Edition by William H. Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Law
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Q1) The U.S.(either Federal,state,or local)does not impose:
A)Franchise taxes.
B)Severance taxes.
C)Occupational fees.
D)Custom duties.
E)Export duties.
Answer: E
Q2) Paige is the sole shareholder of Citron Corporation.During the year,Paige leases a building to Citron for a monthly rental of $80,000.If the fair rental value of the building is $60,000,what are the income tax consequences to the parties involved?
Answer: The rent charged by Paige is not "arms length";as such,Citron Corporation's rent deduction is $60,000 (not $80,000).The $20,000 difference is a nondeductible dividend distribution.For Paige,the change merely requires reclassification.Instead of $80,000 of rent income,she has $60,000 of rent income and $20,000 of dividend income.
Q3) Fraud and statute of limitations
Answer: j
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Chapter 2: Working With the Tax Law
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Q1) A taxpayer must pay any tax deficiency assessed by the IRS and sue for a refund to bring suit in the U.S.Court of Federal Claims.Only in the Tax Court can jurisdiction be obtained without first paying the assessed tax deficiency.
A)True
B)False
Answer: True
Q2) Which court decision would probably carry more weight?
A)Regular U.S.Tax Court decision
B)Reviewed U.S.Tax Court decision
C)U.S.District Court decision
D)Tax Court Memorandum decision
E)U.S.Court of Federal Claims
Answer: B
Q3) Subchapter D refers to the "Corporate Distributions and Adjustments" section of the Internal Revenue Code.
A)True
B)False
Answer: False
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Chapter 3: Tax Formula and Tax Determination an
Overview of Property Transactions
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Sample Questions
Q1) Scholarship funds for tuition
Answer: h
Q2) Global system of taxation
Answer: l
Q3) A taxpayer who itemizes must use Form 1040,and cannot use Form 1040EZ or Form 1040A.
A)True
B)False Answer: True
Q4) All exclusions from gross income are reported on Form 1040. A)True
B)False
Answer: False
Q5) Derek,age 46,is a surviving spouse.If he has itemized deductions of $12,900 for 2016,Derek should not claim the standard deduction.
A)True
B)False
Answer: True
Q6) Long-term capital gains
Answer: i Page 5
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Chapter 4: Gross Income Concepts and Inclusions
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Q1) Under the terms of a divorce agreement,Ron is to pay his former wife Jill $10,000 per month.The payments are to be reduced to $7,000 per month when their 15 year-old child reaches age 18.During the current year,Ron paid $120,000 under the agreement.Assuming all of the other conditions for alimony are satisfied,Ron can deduct from gross income (and Jill must include in gross income)as alimony:
A)$120,000.
B)$84,000.
C)$36,000.
D)$0.
E)None of these is correct.
Q2) Jake is the sole shareholder of an S corporation that earned $60,000 in 2016.The corporation was short on cash and therefore distributed only $15,000 to Jake in 2016.Jake is required to recognize $60,000 of income from the S corporation in 2016.
A)True
B)False
Q3) How does the taxation of Social Security benefits differ from the taxation of an annuity purchased by the taxpayer?
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Chapter 5: Gross Income Exclusions
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Q1) Sarah's employer pays the hospitalization insurance premiums for a policy that covers all employees and retired former employees.After Sarah retires,the hospital insurance premiums paid for her by her employer can be excluded from her gross income.
A)True
B)False
Q2) Barney is a full-time graduate student at State University.He serves as a teaching assistant for which he is paid $700 per month for 9 months and his $5,000 tuition is waived.The university waives tuition for all of its employees.In addition,he receives a $1,500 research grant to pursue his own research and studies.Barney's gross income from the above is:
A)$0.
B)$6,300.
C)$11,300.
D)$12,800.
E)None of these.
Q3) What are the tax problems associated with payments received by a wife from her deceased husband's employer? (Assume the wife renders no services to the employer. )
Q4) What Federal income tax benefits are provided for college students?
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Chapter 6: Deductions and Losses in General
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Q1) For purposes of the § 267 loss disallowance provision,a taxpayer's aunt is a related party.
A)True
B)False
Q2) Beulah's personal residence has an adjusted basis of $450,000 and a fair market value of $390,000.Beulah converts the property to rental use this year.The vacation home rules that limit the amount of the deduction to the rental income will apply and the adjusted basis for depreciation is $390,000.
A)True
B)False
Q3) If a taxpayer operates an illegal business,no deductions are permitted. A)True B)False
Q4) For a vacation home to be classified in the primarily rental use category,what attributes must be present?
Q5) During the year,Jim rented his vacation home for 200 days and lived in it for 19 days.During the remaining days,the vacation home was available for rental use.Is the vacation home subject to the limitation on the deductions of a personal/rental vacation home?
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Chapter 7: Deductions and Losses Certain Business
Expenses and Losses
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Q1) When a nonbusiness casualty loss is spread between two taxable years,the loss in the second year is reduced by 10% of adjusted gross income for the first year.
A)True
B)False
Q2) A theft loss of investment property is an itemized deduction not subject to the 2%-of-AGI floor.
A)True
B)False
Q3) Last year,taxpayer had a $10,000 nonbusiness bad debt.Taxpayer also had an $8,000 short-term capital gain and taxable income of $35,000.If taxpayer collects the entire $10,000 during the current year,$8,000 needs to be included in gross income.
A)True
B)False
Q4) The limit for the domestic production activities deduction (DPAD)uses all W-2 wages paid to employees by the taxpayer during the tax year.
A)True
B)False
Q5) Discuss the effect of alimony in computing a net operating loss.
Page 10
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Chapter 8: Depreciation Cost Recovery Amortization and Depletion
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Sample Questions
Q1) George purchases used seven-year class property at a cost of $200,000 on April 20,2016.Determine George's cost recovery deduction for 2016 for alternative minimum tax purposes,assuming George does not elect § 179 and does not take additional first-year depreciation,if available.
A)$2,500
B)$10,000
C)$14,280
D)$28,580
E)None of the above
Q2) Barry purchased a used business asset (seven-year property)on September 30,2016,at a cost of $200,000.This is the only asset he purchased during the year.Barry did not elect to expense any of the asset under § 179,did not take additional first-year depreciation (if available),and did not elect straight-line cost recovery.Barry sold the asset on July 17,2017.Determine the cost recovery deduction for 2017.
A)$19,133
B)$24,490
C)$34,438
D)$55,100
E)None of the above
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Chapter 9: Deductions Employee and Self Employed
Related Expenses
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Sample Questions
Q1) Sue was trained by Lynn.
Q2) A taxpayer takes six clients to an NBA playoff game.If all of the tickets (list price of $120 each)are purchased on the Internet for $1,800 ($300 each),only $60 ($120 × 50% cutback adjustment)per ticket is deductible.
A)True
B)False
Q3) A deduction for parking and other traffic violations incurred during business use of the automobile is allowed under the actual cost method but not the automatic mileage method.
A)True
B)False
Q4) James has a job that compels him to go to many different states during the year.It is possible that James was never away from his tax home during the year.
A)True
B)False
Q5) When is a taxpayer's work assignment in a new locale temporary? Permanent? What difference does it make?
Q6) Sue files a Form 2106 with her Form 1040.
Page 12
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Chapter 10: Deduction and Losses Certain Itemized
Deductions
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Q1) Charitable contributions that exceed the percentage limitations for the current year can be carried over for up to three years.
A)True
B)False
Q2) Linda,who has AGI of $120,000 in the current year,contributes stock in Mauve Corporation (a publicly traded corporation)to the Salvation Army,a qualified charitable organization.The stock is worth $65,000,and Linda acquired it as an investment four years ago at a cost of $50,000.
a.What is the total amount that Linda can deduct as a charitable contribution,assuming she carries over any disallowed contribution from the current year to future years?
b.Describe the restrictions that apply when calculating the deduction in the carryover years.
Q3) Harry and Sally were divorced three years ago.In July of the current year,their son,Joe,broke his arm falling out of a tree.Joe lives with Sally and Sally claims him as a dependent on her tax return.Harry paid for the medical expenses related to Joe's injury.Can Harry claim the medical expenses he paid for Joe on his tax return?
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Chapter 11: Investor Losses
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Q1) Jed spends 32 hours a week,50 weeks a year,operating a bicycle rental store that he owns at a resort community.He also owns a music store in another city that is operated by a full-time employee.He elects not to group them together as a single activity under the "appropriate economic unit" standard.Jed spends 40 hours per year working at the music store.
A)Neither store is a passive activity.
B)Both stores are passive activities.
C)Only the bicycle rental store is a passive activity.
D)Only the music store is a passive activity.
E)None of the above.
Q2) Individuals with modified AGI of $100,000 can deduct against active or portfolio income losses of up to $25,000 from real estate rental activities in which they actively participate.
A)True
B)False
Q3) Describe the general rules that limit the deduction of investment interest expense.
Q4) Treatment of a disposition of a passive activity at death.
Q5) Significant participation activity.
Q6) Treatment of an installment sale of a passive activity.
Page 14
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Chapter 12: Alternative Minimum Tax
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Q1) Melinda is in the 35% marginal regular tax bracket.She reports a net capital gain of $150,000 on the sale of land which is eligible for the lower tax on net capital gain in calculating the regular income tax.Discuss the tax rate that applies to the $150,000 net capital gain in calculating the tentative AMT for Melinda.
Q2) Interest income on private activity bonds issued before 2009 and after 2010,reduced by expenses incurred in carrying the bonds,is a tax preference item that is included in computing AMTI.
A)True
B)False
Q3) C corporations are not required to make AMT adjustments for depreciation. A)True B)False
Q4) What tax rates apply in calculating the TMT for an individual taxpayer?
Q5) Is it possible that no AMT adjustment is necessary for medical expenses in calculating AMTI for a taxpayer who is at least age 65 even though the floor limitation is different (7.5% of AGI for regular income tax compared to 10% for AMT purposes)?
Q6) Tad and Audria,who are married filing a joint return,have AMTI of $256,000 for 2016.Calculate their AMT exemption.
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Chapter 13: Tax Credits and Payment Procedures
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Q1) Which of the following best describes the treatment applicable to unused business credits?
A)Unused amounts are carried forward indefinitely.
B)Unused amounts are first carried back one year and then forward for 20 years.
C)Unused amounts are first carried back one year and then forward for 10 years.
D)Unused amounts are first carried back three years and then carried forward for 15 years.
E)None of the above.
Q2) In describing FICA taxes,which (if any)of the following statements is incorrect?
A)The base amounts for 2017 probably will increase from the 2016 amounts.
B)The base amounts for the Social Security and Medicare portions are the same.
C)If both spouses work,excess FICA taxes need not result.
D)Excess FICA taxes can be claimed as an income tax credit.
Q3) An expatriate who works in a country with an income tax rate higher than the U.S.rate probably will find the foreign earned income exclusion preferable to the foreign tax credit.
A)True
B)False
Q4) Discuss the treatment of unused general business credits.
Q5) Describe the withholding requirements applicable to employers.
Page 16
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Chapter 14: Property Transactions Determination of Gain and
Loss and Basic Considerations
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Q1) Robert sold his ranch which was his principal residence during the current taxable year.At the date of the sale,the ranch had an adjusted basis of $460,000 and was encumbered by a mortgage of $200,000.The buyer paid him $500,000 in cash,agreed to take the title subject to the $200,000 mortgage,and agreed to pay him $100,000 with interest at 6 percent one year from the date of sale.How much is Robert's realized gain on the sale?
Q2) Identify two tax planning techniques that can be used to avoid the wash sale disallowance of loss.
Q3) Realized losses from the sale or exchange of stock are disallowed if within 30 days before or 30 days after the sale or exchange,the taxpayer acquires substantially identical stock.
A)True
B)False
Q4) A realized loss whose recognition is postponed results in the temporary recovery of more than the taxpayer's cost or other basis.
A)True
B)False
Q5) What is the general formula for calculating the adjusted basis of property?
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Q6) Define a bargain purchase of property and discuss the related tax consequences.
Chapter 15: Property Transactions Nontaxable Exchanges
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Q1) Lily exchanges a building she uses in her rental business for a building owned by Kendall,which she will use in her rental business.The adjusted basis of Lily's building is $120,000 and the fair market value is $170,000.Which of the following statements is correct?
A)Lily's recognized gain is $50,000 and her basis for the building received is $120,000.
B)Lily's recognized gain is $50,000 and her basis for the building received is $170,000.
C)Lily's recognized gain is $0 and her basis for the building received is $120,000.
D)Lily's recognized gain is $0 and her basis for the building received is $170,000.
E)None of the above is correct.
Q2) A realized gain on an indirect (conversion into money)involuntary conversion of business property can be postponed,but a realized loss on an indirect involuntary conversion of business property cannot be postponed.
A)True
B)False
Q3) Discuss the treatment of realized gains from involuntary conversions.
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Chapter 16: Property Transactions Capital Gains and Losses
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Q1) In 2015,Jenny had a $12,000 net short-term capital loss and deducted $3,000 as a capital loss deduction.In 2016,Jenny has a $18,000 0%/15%/20% long-term capital gain and no other capital gain or loss transactions.Which of the statements below is correct for 2016?
A)Jenny has a $18,000 net capital gain.
B)Jenny has a $9,000 net capital gain.
C)Jenny has a $9,000 net capital loss.
D)Jenny has a $3,000 capital loss deduction.
E)Jenny has a $9,000 capital loss deduction.
Q2) For tax purposes,there is no original issue discount on a bond unless the bond is issued for less than its face value and the difference between the face value and the bond issue price is at least one-fourth of 1 percent of the redemption price at maturity multiplied by the number of years to maturity.
A)True
B)False
Q3) Short-term capital gain is eligible for a special tax rate only when it exceeds long-term capital gain.
A)True
B)False
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Chapter 17: Property Transactions Section 1231 and Recapture Provisions
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Q1) A business machine purchased April 10,2015,for $62,000 was fully depreciated in 2015 using § 179 immediate expensing.On August 15,2016,the sole proprietor who owned the machine gave it to his son.On that date,the machine's fair market value was $57,000.The son did not use the machine in business or hold it as inventory and the machine was sold on November 22,2016,for $53,000.What is the amount and nature of the gain or loss from disposition of the machine? Where is it reported in the son's tax return?
Q2) Which of the following is correct?
A)Improperly classifying a § 1231 loss as a capital loss might affect adjusted gross income.
B)Improperly classifying a capital loss as a § 1231 loss might affect adjusted gross income.
C)Misclassifying a § 1231 gain as a short-term capital gain might affect adjusted gross income.
D)Misclassifying a short-term capital gain as a § 1231 gain might affect adjusted gross income.
E)All of the above.
Q3) Depreciation recapture under § 1245 and § 1250 is reported on Form 4797.
A)True
B)False
Page 20
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Chapter 18: Accounting Periods and Methods
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Q1) Which of the following taxpayers is required to use the accrual method of accounting?
A)A retail business with average annual gross receipts of $800,000.
B)A medical doctor with average annual gross receipts of $2 million.
C)An insurance agency with average annual gross receipts of $2 million.
D)All of the above are required to use the accrual method.
E)None of the above is required to use the accrual method.
Q2) Charlotte sold her unincorporated business for $600,000 in 2016.The sales contract allocated $120,000 to equipment,$300,000 to land,and $180,000 to goodwill.Charlotte had a $0 basis in the goodwill,the land cost $150,000,and the equipment originally cost $250,000 but it was fully depreciated.What is the amount of the gain eligible for installment sales treatment?
A)$0
B)$330,000
C)$450,000
D)$600,000
E)None of the above
Q3) What incentives do the tax accounting rules provide for taxpayers to voluntarily change from an incorrect method of accounting that has reduced the company's tax liability in prior years?
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Chapter 19: Deferred Compensation
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Q1) A cash balance plan is a hybrid form of pension plan that is similar in many aspects to a defined contribution plan.
A)True
B)False
Q2) An individual is considered an active participant in an employer-sponsored retirement plan merely because an individual's spouse is an active participant for any part of a plan year in applying the IRA phase-out provision.
A)True
B)False
Q3) What is a defined contribution plan?
Q4) Dana contributes $2,000 too much to a § 401(k)plan which is not returned within 2 1/2 months after the close of the tax year.The employer will have to pay a tax of $200. A)True
B)False
Q5) If a person has funds from sources other than retirement assets when he or she retires,which retirement asset should be spent first?
Q6) What is a highly compensated employee?
Q7) Compare a § 401(k)plan with an IRA.
Page 22
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Chapter 20: Corporations and Partnerships
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Q1) Excess long-term capital losses are carried forward as short-term capital losses.
Q2) Arthur forms Catbird Corporation with the following investment: Asset Basis Fair Market Value Marketable securities
$600,000
$400,000
Land
500,000
800,000
Arthur receives all of the stock of Catbird.
a.What is Arthur's basis in the Catbird Corporation stock?
b.What is Catbird Corporation's basis in the marketable securities? The land?
Q3) Why were the check-the-box Regulations issued?
Q4) Excess capital losses cannot be offset against ordinary income.
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