Principles of Taxation
Exam Materials
Course Introduction
Principles of Taxation introduces students to the foundational concepts, laws, and policies that govern the taxation systems in various jurisdictions. The course explores the objectives of taxation, types of taxes, tax bases, and administrative structures, while examining the principles of equity, efficiency, certainty, and simplicity in tax design. Students will learn about the impact of taxes on individuals, businesses, and government revenues, as well as the ethical considerations and economic implications of different tax policies. Through real-world examples and case studies, the course equips students with the analytical skills needed to understand and apply tax principles in both personal and professional contexts.
Recommended Textbook
Concepts in Federal Taxation 2017 24th Edition by Kevin E. Murphy
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16 Chapters
2073 Verified Questions
2073 Flashcards
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Chapter 1: Federal Income Taxation-An Overview
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151 Verified Questions
151 Flashcards
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Sample Questions
Q1) Sally is an electrician employed by Bogie Company.Sam is a self-employed electrician.During the current year,Sally's salary is $85,000 and Sam's net self-employment income is $85,000.Which of the following statements about the Social Security and self-employment taxes paid is/are correct?
I.Sam pays more self-employment tax than Sally pays in Social Security tax.
II.Sam's self-employment tax is equal to the Social Security tax paid on Sally's income.
A)Only statement I is correct.
B)Only statement II correct.
C)Both statements are correct.
D)Neither statement is correct.
Answer: C
Q2) Horizontal equity exists when two similarly situated taxpayers are taxed the same. A)True
B)False
Answer: True
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Chapter 2: Income Tax Concepts
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153 Flashcards
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Sample Questions
Q1) Carlota sells her personal automobile for $1,000.The car cost her $10,000 nine years ago.What are the tax effects of the current sale?
I.Carlota realizes a transaction loss of $9,000 due to the capital recovery concept.
II.Carlota realizes income of $1,000 due to the all-inclusive-income concept.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Answer: A
Q2) The taxpayer will be able to benefit from capital recovery on business equipment over the life of the asset and any remaining capital will be recovered when the asset is sold.
A)True
B)False
Answer: True
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Chapter 3: Income Sources
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152 Flashcards
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Sample Questions
Q1) Ramsey Corporation allows an employee,Corrine,to use a company car for her vacation to San Diego.
I.Corrine will not need to recognize the value of the use of the car since it was not cash.
II.A "cash equivalent approach" is used to measure the amount of income that must be recognized by Corrine.
III.The employer/employee relationship indicates that the receipt of the use of the car is a type of compensation for services rendered.
IV.Income recognition is not necessary in this case.
A)Only statement I is correct.
B)Only statement IV is correct.
C)Only statements II and III are correct.
D)Only statements I and IV are correct.
E)Only statements II, III, and IV are correct.
Answer: C
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Chapter 4: Income Exclusions
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160 Flashcards
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Sample Questions
Q1) Gordon's family health insurance costs $6,000 annually.Gordon and his wife are in the 28% marginal tax rate bracket.His employer offers a cafeteria plan that would allow him to cover the insurance premium.How much would the insurance coverage effectively cost if he took advantage of his employer's cafeteria plan?
A)$1,680
B)$3,000
C)$4,320
D)$5,000
Q2) Julia receives $6.3 million in compensatory damages for a personal physical injury.
Q3) Michelle's employer pays for her graduate school classes.Tuition during the year totals $2,500 (her employer does not have a qualified plan).
Q4) Patrick ran up a large credit card debt.Since the bank wanted to keep Patrick's account they forgave $5,000 of his balance.Patrick was solvent before and after the forgiveness.He has to include the $5,000 in his income.
A)True
B)False
Q5) Jeane's employer pays his medical premiums each month ($130/month).
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Page 6
Chapter 5: Introduction to Business Expenses
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166 Verified Questions
166 Flashcards
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Sample Questions
Q1) Start-up costs over $5,000.
A)Capitalized and amortized over a number of accounting periods
B)Expensed in the period incurred
C)Not deductible
D)Can be capitalized and amortized or deductible depending on the amount of the expenditure
Q2) Bowen is planning to quit his job as a plumber and open a paint store.He has incurred expenses of $8,000 dealing with the opening of the store and will be able to deduct all of these expenses.
A)True
B)False
Q3) Covenant not to compete for 4 years
A)Capitalized and amortized over a number of accounting periods
B)Expensed in the period incurred
C)Not deductible
D)Can be capitalized and amortized or deductible depending on the amount of the expenditure
Q4) 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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Sample Questions
Q1) To be deductible,meals and entertainment must be both an ordinary and necessary business expense and must be either directly related to or associated with the active conduct of an activity for which the taxpayer has a business purpose.
A)True
B)False
Q2) In 2016,a husband and wife who are less than 50 and qualify may contribute $12,000 to two separate IRA accounts as long as their total income exceeds $12,000.The total amount contributed to each account cannot exceed $6,000.
A)True
B)False
Q3) Larry is a self-employed insurance salesperson.He decides to take his best customer to a Pacers basketball game.Larry is able to buy two floor seat tickets for $500 each.The face amount of the tickets is $200 each.How much of the total cost can Larry deduct?
A)$- 0 -
B)$ 200
C)$ 400
D)$ 500
E)$1,000
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Chapter 7: Losses-Deductions and Limitations
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127 Verified Questions
127 Flashcards
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Sample Questions
Q1) Brent is single and owns a passive activity that has a basis of $25,000 and a suspended passive loss of $8,000.He acquired the passive activity in 2010.Brent's taxable income from active and portfolio income is $85,000,and he has no other capital gains or losses for the year.
a.What is the effect on Brent's taxable income if he sells the passive activity for $42,000?
b.What is the effect on Brent's taxable income if he sells the passive activity for $13,000?
c.What is the effect on Brent's taxable income if he dies this year while the fair market value of the passive activity is $30,000?
d.What is the effect on Brent's taxable income if he dies this year while the fair market value of the passive activity is $18,000?
e.What is the effect on Brent's taxable income if he gives the passive activity to his brother Norm when the fair market value of the passive activity is $30,000?
Q2) If a corporation incurs a net operating loss,what would cause it to elect to carry the loss forward and forsake the carryback? Explain.
Q3) Why did Congress enact the at-risk rules?
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Chapter 8: Taxation of Individuals
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163 Verified Questions
163 Flashcards
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Sample Questions
Q1) Which of the following will prevent a couple from filing as married filing joint in 2016?
I.One spouse dies on June 6,2016.
II.The couple is legally married,but is living apart throughout the year.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Lillian and Michael were divorced last year.Michael has custody of their two children.Lillian pays $8,600 in child support payments during the current year.The total cost of supporting the children is $12,500.Michael and Lillian do not have any special agreement about dependency exemptions.How many total exemptions may Michael claim for the current year?
Q3) Explain the support test and the gross income test to be a qualifying relative.
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Page 10
Chapter 9: Acquisitions of Property
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Sample Questions
Q1) Adjusted 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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110 Verified Questions
110 Flashcards
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Sample Questions
Q1) The Section 179 election promotes which of the following tax concept(s)or doctrine(s)?
I.Claim of Right Doctrine.
II.Administrative Convenience Concept.
III.Tax benefit rule.
IV.Substance-Over-Form Doctrine.
A)Only statement I is correct.
B)Only statement II is correct.
C)Statements I, II, and IV are correct.
D)Statements II and IV are correct.
E)Statements I, II, III, and IV are correct.
Q2) While Congress has enacted several different depreciation methods,all currently owned assets are depreciated using the method in effect when the asset was placed in service.
A)True
B)False
Q3) Why would a taxpayer ever elect to use the alternative depreciation system (ADS)rather than the MACRS?
Q4) Discuss why listed property gets special attention.
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Chapter 11: Property Dispositions
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139 Flashcards
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Sample Questions
Q1) Unrecaptured Section 1250 gain
I.is subject to a maximum tax rate of 25%.
II.applies only to real property owned by individuals.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Dragonian Corporation sells a depreciable asset.Dragonian paid $50,000 for the asset.Accelerated depreciation on the asset is $12,000 up to the date of sale.Straight-line depreciation is $8,000.Determine the amount and character of the gain (loss)on the sale under each of the following assumptions:
a.The asset is equipment. Dragonian deducted the maximum depreciation and the sales price is $44,000.
b.The asset is an office building purchased in 1984. Dragonian deducted the maximum depreciation and the sales price is $54,000.
c.The asset is an office building purchased in 2006. Dragonian deducted straight-line depreciation and the sales price is $54,000.
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Page 13
Chapter 12: Non-Recognition Transactions
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112 Flashcards
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Sample Questions
Q1) Which of the following is/are correct regarding the sale of a principal residence?
I.A taxpayer who is single and fails to meet the ownership or use test due to change in employment is entitled to a pro rata share of the $250,000 exclusion.
II.A single taxpayer can exclude up to $250,000 of the gain on the sale of a vacation home.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Taxpayers are allowed to structure transactions through third parties that qualify as exchanges if they meet certain time requirements for identifying properties and closing the transaction.
A)True
B)False
Q3) Coke-Cola bonds for General Foods bonds.
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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101 Flashcards
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Sample Questions
Q1) Nigel and Frank form NFS,Inc.an electing S corporation,by combining the assets of their respective businesses.Nigel contributes $10,000 and assets worth $90,000 (adjusted basis of $60,000)for a 1/3 interest.Frank contributes $90,000 and assets worth $270,000 (adjusted basis of $150,000)for a 2/3 interest.NFS also assumes $60,000 of debt on Frank's assets.What is Frank's basis in his stock?
A)$180,000
B)$220,000
C)$240,000
D)$300,000
E)$360,000
Q2) There must be at least one member of a Limited Liability Company who is personally liable for the debts of the business.
A)True
B)False
Q3) Once a corporation is formed,an exchange of the corporation's stock for property is always a nontaxable event.
A)True
B)False
Q4) Discuss the characteristics of a personal service corporation (PSC).
Page 15
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Chapter 14: Choice of Business Entity-Operations and Distributions
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Sample Questions
Q1) The Gilpin Partnership has an operating loss of $400,000 for the current year.Hawkins is a general partner and owns a 40% interest in the partnership.At the beginning of the year,Hawkins' adjusted basis in the partnership interest is $30,000.During the year the partnership borrows $120,000 with a recourse note.How much of the partnership loss can Hawkins deduct on his current-year income tax return?
A)$- 0 -
B)$30,000
C)$70,000
D)$78,000
E)$200,000
Q2) Since Wisher,Inc.owns 80% of Patriot,Inc.(a U.S.corporation)the dividend received deduction rate is 100%.
A)True
B)False
Q3) Withdrawals of cash by a partner are taxable.
A)True
B)False
Q4) Discuss two tax-planning techniques that can be used by a 100% owner-employee to reduce his/her tax liability.
Page 16
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Chapter 15: Choice of Business Entity-Other Considerations
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Sample Questions
Q1) Savings incentive match plan for employees (SIMPLE)were created to encourage small businesses to establish retirement plans for their employees.
A)True
B)False
Q2) A U.S.formed multinational corporation
I.Can avoid the payment of tax on appreciated property by transferring the appreciated property to a controlled foreign corporation and then selling the property.
II.Is not subject to the transfer pricing rules that a foreign multinational must observe.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) One of the benefits of an incentive stock option is that the employee can sell the option at any time.
A)True
B)False
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Chapter 16: Tax Research
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Sample Questions
Q1) Which of the following statements is correct?
I.The history of a cited case refers to all other decisions by higher or lower courts in the same case.
II.The citator gives information about how the decision of a cited case has been interpreted by other courts.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) The Tax Court strictly follows the precedent of prior decisions of the Court of Appeals for a particular circuit when
A)the taxpayer requests it to do so.
B)the IRS requests it to do so.
C)the taxpayer resides in the United States.
D)the taxpayer resides in that circuit.
Q3) Dwayne is upset by an IRS agent's decision after an audit of Dwayne's tax return.Dwayne tells you,"I'm taking this case all the way to the Supreme Court." Comment on the appropriateness of Dwayne's statement.
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Page 18