Principles of Taxation
Chapter Exam Questions
Course Introduction
Principles of Taxation introduces students to the fundamental concepts and structures that underpin tax systems in contemporary societies. The course covers the purpose, types, and administration of taxes, principles of tax equity and efficiency, and the economic and social implications of taxation. Students will explore various tax instruments such as income tax, corporate tax, consumption taxes, and capital taxes, alongside compliance obligations and the impact of tax policy on individuals, businesses, and government revenue. By examining both theoretical frameworks and practical applications, the course equips students with a solid foundation for understanding and evaluating taxation in a global context.
Recommended Textbook
South Western Federal Taxation 2014 Individual Income Taxes 37th Edition by William Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) Timothy recently converted a warehouse into apartment lofts,which he is renting to single professionals.In making the conversion,he emphasized improvements that were portable in nature.Thus,the sprinkler system,heating and cooling units,and room dividers are all removable from the building.In terms of ad valorem property taxes,what was Timothy trying to accomplish?
Answer: When personalty is permanently attached to real estate so that its removal will cause irreparable damage,it becomes a fixture.Consequently,it ceases to be personalty and is now regarded as realty.The classification of an asset is important because different ad valorem taxes apply to realty than to personalty.For one thing,the ad valorem tax on realty is less easily avoided.Also to be considered is the possibility that the ad valorem tax on personalty (even if it cannot be avoided)could be lower than that applicable to realty.
Q2) Taxes not imposed by the Federal government include:
A) Tobacco excise tax.
B) Hotel occupancy tax.
C) Customs duties (tariffs on imports).
D) Gas guzzler tax.
E) None of the above.
Answer: B
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Chapter 2: Working With the Tax Law
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Q1) Tax bills are handled by which committee in the U.S.House of Representatives?
A) Taxation Committee.
B) Ways and Means Committee.
C) Finance Committee.
D) Budget Committee.
E) None of the above.
Answer: B
Q2) The following citation can be a correct citation: Rev.Rul.95-271,I.R.B.No.54,18.
A)True
B)False
Answer: False
Q3) There is a direct conflict between a Code section adopted in 2004 and a treaty with France (signed in 2008).The Code section controls.
A)True
B)False
Answer: False
Q4) There are 11 geographic U.S.Circuit Court of Appeals.
A)True
B)False
Answer: True
Page 4
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Chapter 3: Tax Formula and Tax Determination; an
Overview of Property Transactions
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Q1) In which,if any,of the following situations will the kiddie tax not apply?
A) The child is married but does not file a joint return.
B) The child has unearned income of $1,900 or less.
C) The child has unearned income that exceeds more than half of his (or her) support.
D) The child is under age 24 and a full-time student.
E) None of the above.
Answer: B
Q2) Gain on the sale of collectibles held for more than 12 months could be subject to tax at a rate lower than 28%.
A)True
B)False
Answer: True
Q3) List at least three exceptions to the application of the kiddie tax.
Answer: · Unearned income of $1,900 or less.
· Age 19 (or age 24 if a full-time student)or older.
· Both parents deceased.
· Earned income in excess of 50% of support.
· Married and filing a joint return with spouse.
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Under the terms of a divorce agreement,Kim was to pay her husband Tom $3,000 per month in alimony and $2,000 per month in child support.For a twelve-month period,Kim can deduct from gross income (and Tom must include in gross income):
A) $60,000.
B) $36,000.
C) $24,000.
D) $0.
E) None of the above.
Q2) The effects of a below-market loan for $100,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are:
A) The corporation has imputed interest income and the employee is deemed to have received a gift.
B) The corporation has imputed interest income and dividends paid.
C) The employee has no income unless the funds are invested and produce investment income for the year.
D) The employee has imputed compensation income and the corporation has imputed interest income.
E) None of the above.
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Chapter 5: Gross Income: Exclusions
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Q1) Gary cashed in an insurance policy on his life.He needed the funds to pay for his terminally ill wife's medical expenses.He had paid $12,000 in premiums and he collected $30,000 from the insurance company.Gary is not required to include the gain of $18,000 ($30,000 - $12,000)in gross income.
A)True
B)False
Q2) Bob had a terminal illness and realized that he "can't take it with him." Therefore,he cashed in his insurance policy and received $120,000.He had paid $50,000 in premiums on the policy.He used the money to fulfill his lifelong ambitions of going to the Super Bowl,driving an expensive sports car,and vacationing in Bermuda. Was Bob's behavior consistent with the Congressional intent in providing the tax exemption he was permitted to use?
Q3) Ashley received a scholarship to be used as follows: tuition $6,000; room and board $9,000; and books and laboratory supplies $2,000.Ashley is required to include only $9,000 in her gross income.
A)True B)False
Q4) What Federal income tax benefits are provided for college students?
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Page 7
Chapter 6: Deductions and Losses: in General
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Q1) The Code defines what constitutes a trade or business.
A)True
B)False
Q2) Which of the following cannot be deducted as a § 162 business expense?
A) Expenses of investing in rental property.
B) Charitable contributions made by a sole proprietorship.
C) Fines and penalties.
D) Only a. and c. cannot.
E) a., b., and c. cannot.
Q3) Graham,a CPA,has submitted a proposal to do the annual audit for a municipality.Owen,the city treasurer,tells Graham that for a $1,000 fee,he will use his influence to have the audit awarded to Graham.What factors are relevant in determining if Graham can deduct the $1,000 payment assuming he pays the fee to Owen?
Q4) Investigation of a business unrelated to one's present business never results in a current period deduction of the entire amount if the amount of the investigation expenses exceeds $5,000.
A)True
B)False
Q5) 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) If a taxpayer has an NOL in 2012 of $20,000,of which $8,000 is attributable to a theft of rental use property,the taxpayer may:
A) Carry all of the NOL of $20,000 back 5 years.
B) Carry all of the NOL of $20,000 back 3 years.
C) Carry $8,000 of the NOL back 3 years and the remainder of the NOL of $12,000 back 2 years.
D) All of the above.
E) None of the above.
Q2) Depreciation on a building used for research may be a research and experimental expense.
A)True
B)False
Q3) A theft loss of investment property is an itemized deduction not subject to the 2%-of-AGI floor.
A)True
B)False
Q4) Why was the domestic production activities deduction (DPAD)enacted by Congress?
Q6) How is qualified production activities income (QPAI)calculated? Page 9
Q5) Discuss the effect of alimony in computing a net operating loss.
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Page 10
Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Q1) Nora purchased a new automobile on July 20,2012,for $29,000.The car was used 60% for business and 40% for personal use.In 2013,the car was used 30% for business and 70% for personal use.Nora elects not to take additional first-year depreciation.Determine the cost recovery recapture and the cost recovery deduction for 2013.
Q2) Discuss the beneficial tax consequences of an SUV not being classified as a passenger automobile.
Q3) Discuss the difference between the half-year convention and the mid-quarter convention.
Q4) On April 15,2012,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.Sam elected not to take additional first-year depreciation.Determine Sam's cost recovery from these two items for 2013.
Q5) If a used $15,000 automobile used 100% for business in the first year (2012)fails the 50% business usage test in the second year,no cost recovery will be recaptured.
A)True B)False
Q6) Discuss the reason for the inclusion amount with respect to leased automobiles.
Page 11
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) After she finishes working at her main job, Ann returns home, has dinner, then drives to her second job. Ann may deduct the mileage between her home and second job.
A)True
B)False
Q2) Tired of renting,Dr.Smith buys the academic robes she will wear at her college's graduation procession.The cost of this attire qualifies as a uniform expense.
A)True
B)False
Q3) At age 65,Camilla retires from her job in Boston and moves to Florida.As a retiree,she is not subject to the time test in deducting her moving expenses.
A)True
B)False
Q4) A deduction for parking and other traffic violations is allowed under the actual cost method but not the automatic mileage method.
A)True
B)False
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) Pedro's child attends a school operated by the church the family attends.Pedro made a donation of $1,000 to the church in lieu of the normal registration fee of $200.In addition,Pedro paid the regular tuition of $6,000 to the school.Based on this information,what is Pedro's charitable contribution?
A) $0.
B) $800.
C) $1,000.
D) $6,800.
E) $7,000.
Q2) In April 2012,Bertie,a calendar year cash basis taxpayer,had to pay the state of Michigan additional income tax for 2011.Even though it relates to 2011,for Federal income tax purposes the payment qualifies as a tax deduction for tax year 2012.
A)True
B)False
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) Eric makes an installment sale of a passive activity having suspended losses of $40,000.He collects 25% of the sales price in the current year,and will collect 25% in each of the next three years.Eric can deduct $10,000 of the passive loss this year.
A)True
B)False
Q2) Wolf Corporation has active income of $55,000 and a passive loss of $33,000 in the current year.Wolf cannot deduct the $33,000 loss if it is a closely held C corporation that is not a personal service corporation.
A)True
B)False
Q3) Bruce owns a small apartment building that produces a $25,000 loss during the year.His AGI before considering the rental loss is $85,000.Bruce must be an active participant with respect to the rental activity in order to deduct the $25,000 loss under the real estate rental exception.
A)True
B)False
Q4) What special passive loss treatment is available to real estate activities?
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Chapter 12: Alternative Minimum Tax
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Q1) The amount of the deduction for medical expenses under the regular income tax may be different than for AMT purposes.
A)True
B)False
Q2) The AMT adjustment for research and experimental expenditures can be avoided if the taxpayer capitalizes the expenditures and amortizes them over a 10-year period.
A)True
B)False
Q3) The exercise of an incentive stock option (ISO)increases both the AMTI and regular taxable income in the year of exercise.
A)True
B)False
Q4) Income from some long-term contracts can be reported using the completed contract method for regular income tax purposes,but the percentage of completion method is required for AMT purposes for all long-term contracts.
A)True
B)False
Q5) What is the relationship between taxable income and AMTI?
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Chapter 13: Tax Credits and Payment Procedures
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Q1) If a taxpayer is required to recapture any tax credit for rehabilitation expenditures,the recapture amount need not be added to the adjusted basis of the rehabilitation expenditures.
A)True
B)False
Q2) Which of the following statements is true regarding the education tax credits?
A) The lifetime learning credit is available for qualifying tuition and related expenses incurred by students pursuing only graduate degrees.
B) The American Opportunity credit permits a maximum credit of 20% of qualified expenses up to $10,000 per year.
C) The American Opportunity credit is calculated per taxpayer, while the lifetime learning credit is available per eligible student.
D) Continuing education expenses do not qualify for either education credit.
E) None of the above statements is true.
Q3) Some foreign taxes do not qualify for the foreign tax credit.
A)True
B)False
Q4) Describe the withholding requirements applicable to employers.
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Questions
Q1) If the alternate valuation date is elected by the executor in 2012,the total basis of inherited property will be more than what it would have been if the primary valuation date and amount had been used.
A)True
B)False
Q2) Al owns stock with an adjusted basis of $100,000 and a fair market value of $300,000.He gives the stock to Jane on July 1,2011.When Jane dies,the fair market value of the stock is $900,000.Jane's will provides that Al is to receive the stock.Which of the following is false?
A) If Jane dies on June 1, 2012, Al's basis for the stock is $100,000.
B) If Jane dies on August 1, 2012, Al's basis for the stock is $900,000.
C) If Jane dies on June 15, 2012, Al's basis is $300,000.
D) If Jane dies on July 1, 2012, Al's basis is $100,000.
E) All of the above are true.
Q3) The amount of the loss basis of a gift will differ from the amount of the gain basis only if at the date of the gift the adjusted basis of the property exceeds the property's fair market value.
A)True B)False
Page 17
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) Gains and losses on nontaxable exchanges are deferred because the tax law recognizes that nontaxable exchanges result in a change in the substance but not the form of the taxpayer's relative economic position.
A)True
B)False
Q2) Which of the following types of transactions qualify for nonrecognition treatment?
A) Exchange by a shareholder of stock in Chevron for stock in Shell.
B) Investment of the proceeds from the sale of the stock of a publicly traded company in the common stock of a specialized small business investment company (SSBIC) within 60 days of the sale.
C) Investment of proceeds from the sale of qualified small business stock in another qualified small business stock within 60 days of the sale.
D) Only b. and c.
E) a., b., and c.
Q3) Libby's principal residence is destroyed by a tornado.She is single and her realized gain is $360,000.Is it possible for Libby's recognized gain to be $0?
Q4) Discuss the treatment of losses from involuntary conversions.
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) On June 10,2012,Ebon,Inc.acquired an office building as a result of a like-kind exchange.Ebon had given up a factory building that it had owned for 26 months as part of the like-kind exchange.Which of the statements below is correct?
A) The holding period of the factory building includes the holding period of the office building.
B) The holding period of the office building starts on June 11, 2012.
C) The holding period of the office building starts on June 10, 2012.
D) The holding period of the office building includes the holding period of the factory building.
E) None of the above.
Q2) Since the Code section that defines "capital asset" says what is not a capital asset,other Code sections have to help determine what is and what is not a capital gain or loss.
A)True
B)False
Q3) The only things that the grantee of an option may do with the option are exercise it or let it expire.
A)True
B)False
Page 19
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Chapter 17: Property Transactions: Section 1231 and Recapture Provisions
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Q1) Section 1250 depreciation recapture will apply when accelerated depreciation was used on property used outside the United States and the property is sold at a gain.
A)True
B)False
Q2) In 2012 Angela,a single taxpayer with no dependents,disposed of for $44,000 a business building which cost $100,000.$60,000 of depreciation had been taken on the building.Angela has a short-term capital loss of $3,000 this year.She has taxable income (not related to property transactions)of $125,000.She has no § 1231 lookback loss.What is the amount and nature of the gain or loss,what is Angela's taxable income,and what is her tax on the taxable income?
Q3) Which of the following assets held by a cash basis accounting firm is a § 1231 asset?
A) An account receivable from a client.
B) A desk used in the business and held more than one year.
C) An investment in Orange Company common stock.
D) A computer used in the business, held more than one year, but fully depreciated under § 179 when acquired.
E) b. and d.
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Chapter 18: Accounting Periods and Methods
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Q1) The Seagull Partnership has three equal partners.Partner A's tax year ends June 30th,and Partners B and C use a calendar year.If the partnership uses the calendar year to report its income,Partner A is permitted to defer partnership income earned from July through December 2012 until he files his tax return for his year ending June 30,2013.
A)True
B)False
Q2) Under the percentage of completion method,if the actual costs are ____ the estimated costs,the taxpayer must pay interest on the underpayment of prior years' taxes.
A) Greater than.
B) Less than.
C) Equal to or greater than.
D) Equal to.
E) None of the above.
Q3) A retailer must actually receive a claim for refund from the customer before a deduction can be taken for the refund.
A)True
B)False
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Chapter 19: Deferred Compensation
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Q1) Amit decides to defer 20% of his $340,000 salary from Maroon,Inc.,under a nonqualified deferred compensation plan for 10 years.Maroon,Inc.,has a marginal tax rate of 34% and can earn approximately 7% after-tax return over the next 10 years.Compute any tax ramifications.
Q2) Susan,an executive,receives a golden parachute payment of $500,000 from her employer.Her average annual compensation for the most recent five years is $100,000.Which of the following statements is correct?
A) The disallowed deduction to the employer is $500,000, and the excise tax to Susan is $100,000.
B) The disallowed deduction to the employer is $400,000, and the excise tax to Susan is $80,000.
C) The disallowed deduction to the employer is $100,000, and the excise tax to Susan is $20,000.
D) The disallowed deduction to the employer is $100,000, and the excise tax to Susan is zero.
E) None of the above.
Q3) In a profit sharing plan,a separate account is maintained for each participant. A)True B)False
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Chapter 20: Corporations and Partnerships
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Q1) In return for a 10% interest in the Sapphire Partnership,Lily transfers cash of $50,000 and land (basis of $200,000; fair market value of $300,000).Lily's basis in her Sapphire Partnership interest is $250,000.
A)True
B)False
Q2) If property contributed to a partnership is subject to a liability (assumed by the partnership),gain is recognized to the contributing partner to the extent of the liability. A)True
B)False
Q3) Sophia contributes land to the Tan Partnership for a 30% interest in capital and profits.The land (adjusted basis of $900,000 and fair market value of $1.4 million)is subject to a mortgage of $600,000 which the partnership assumes.What is Sophia's basis in the Tan Partnership?
Q4) An S corporation cannot be a partner in a partnership.
A)True B)False
Q5) In adjusting the taxable income of a corporation to arrive at current E & P,the dividends received deduction is added.Why?
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