Principles of Taxation Exam
Questions
Course Introduction
Principles of Taxation introduces students to the fundamental concepts and frameworks of tax law and policy. The course covers the objectives and functions of taxation, the structure of various tax systems, and the principles guiding the assessment and collection of taxes. Emphasis is placed on the distinction between direct and indirect taxes, the roles of government agencies, taxpayer responsibilities, and the legal and ethical considerations inherent in tax practice. Through case studies and practical examples, students will develop an understanding of how taxation affects individuals, businesses, and government revenue, providing a foundation for further study in accounting, law, finance, and public administration.
Recommended Textbook
Concepts in Federal Taxation 2017 24th Edition by Kevin E. Murphy
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Chapter 1: Federal Income Taxation-An Overview
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Q1) The Statements on Standards for Tax Services (SSTS)have common concepts running through most of them.Which of the following statements are parts of the SSTSs?
I.The preparer may in good faith rely upon,without verification,information furnished by the client.
II.There is confidentiality of the CPA-client relationship.
III.Taxpayer supplied estimates may be used to prepare returns if it is impractical to obtain exact data and the estimates are reasonable.
IV.The preparer must never disclose to the IRS any facts about the client's tax return information -- unless the client approves disclosure,or the preparer is required to do so by law.
A)Only statement II is correct.
B)Statements I, II, and IV are correct.
C)Statements II and III are correct.
D)Statements I, II, and III are correct.
E)Statements I, II, III, and IV are correct.
Answer: E
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Page 3
Chapter 2: Income Tax Concepts
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Q1) Allowing individuals to deduct a standard deduction amount in lieu of itemizing their allowable personal deductions is an application of the
A)Administrative Convenience Concept.
B)Wherewithal-to-Pay Concept.
C)Annual Accounting Period Concept
D)Capital Recovery Concept.
E)Business Purpose Concept.
Answer: A
Q2) The Nadal Company mails its annual dividend check on December 31.Even when the shareholders receive their check in the following year,they must report the income in the year the check was written and mailed.
A)True
B)False
Answer: False
Q3) At what three points in time might a given expenditure be deductible? a. ______________________ b. ______________________
c. ______________________
Answer: 11ea87a7_1c44_f220_8726_6518ead4461d_TB2038_00
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Page 4
Chapter 3: Income Sources
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Sample Questions
Q1) Penny,age 45,purchased an annuity contract that cost $45,000.The contract will pay Penny $600 per month for 10 years after she reaches age 62.During the current year,Penny turns 62 and receives 4 payments under the contract.Penny's taxable income from the annuity payments is:
A)$900
B)$1,500
C)$1,708
D)$2,250
E)$2,400
Answer: A
Q2) Which of the following items is not a capital asset in the hands of the taxpayer?
A)Taxpayer has a set of wrenches he uses to work on his personal auto.
B)Taxpayer has a $6,000 wedding dress she keeps as a remembrance of her wedding.
C)Taxpayer owns city of Topeka bonds.
D)Taxpayer is an amateur golfer but has a set of championship golf clubs
E)All of the above items are capital assets.
Answer: E
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Chapter 4: Income Exclusions
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Q1) Ally served as chairperson of the local school board.Upon completion of her term in office,the employees in the school district offices take up a collection and purchase her a silver sterling tray in recognition of her outstanding service to the organization.The value of the tray is $200.What are the tax effects of the award?
I.The value of the tray is included in gross income because of services rendered.
II.The tray is a gift because it is from a detached and disinterested generosity.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both are correct.
D)Neither is correct.
Q2) Systech offered its stockholders a choice between stock and cash for their annual dividend.Since Carol has chosen stock,she does not have to include the dividend in income.
A)True
B)False
Q3) Frank receives $1,000 interest income from City of St Louis bonds.
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Chapter 5: Introduction to Business Expenses
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Q1) Amortizable or deductible expense
A)Automobile used 75% for business.
B)Investment expenses on municipal bonds.
C)Cost of investigating a new trade or business that the taxpayer enters.
D)Can be separated into two classifications.
E)Safety-deposit box for taxable investments.
F)Expenditure to influence legislation.
G)Cost of a new roof for office building.
H)Relates to an income producing activity mainly carried on for recreation or personal enjoyment.
I)Deductibility depends on income and amount of personal and rental use.
J)Deductibility depends on whether the area is used exclusively for trade or business activities.
Q2) An expense that is incurred for the production of rent will be deducted for adjusted gross income.
A)True
B)False
Q3) List the criteria necessary for an expenditure to be deductible as a trade or business expense or an expense for the production of income.
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Page 7
Chapter 6: Business Expenses
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Q1) Ester is a sales representative for a pharmaceutical company.She receives a monthly travel allowance from the company to cover her travel costs (transportation,food,lodging,entertainment,etc.).If Ester is not required to account to the company for the use of the travel advance
I.Ester will only have gross income to the extent her travel allowance exceeds her actual costs.
II.Ester must include the travel allowance in her gross income.Her actual costs are deductible from AGI,subject to all applicable limits on such deductions.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) 50% of the self-employment tax is deductible as a miscellaneous itemized deduction from adjusted gross income.
A)True B)False
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Chapter 7: Losses-Deductions and Limitations
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Q1) Recourse debt
A)A loss that is generally not deductible.
B)The borrower is personally liable for the debt.
C)The loss is used to offset income in future periods.
D)A liability that is only secured by the underlying property.
E)The loss may be used to offset income from prior periods.
F)A type of stock that receives some ordinary loss treatment.
G)Involved in a rental activity for more than 500 hours in a year.
H)Cash or other assets contributed plus recourse debts of the activity.
I)Owns at least a 10% interest and is significantly involved in the rental activity.
J)The amount of the loss for fully destroyed property is the property's adjusted basis.
K)The amount of loss is limited to the lower of the property's adjusted basis, or the reduction in fair market value.
L)Management is left to at least one general partner whose liability is not limited and who is responsible for the on-going activities of the business.
Q2) Why do the wash sale rules apply to the sale of stock at a loss but not to the sale of stock at a gain?
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Page 9
Chapter 8: Taxation of Individuals
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Sample
Questions
Q1) Children under 18 and full time students under 24 are taxed differently than other taxpayers if
I.Their unearned income exceeds $2,100.
II.Their parents' marginal tax rate exceeds 15%.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Travel and lodging expense of $800 incurred by an employee on a business related trip (no reimbursement).Amount: $800
Q3) Erin is 67,single and has an adjusted gross income of $14,300.She has no dependents and her itemized deductions are $6,000.What is her 2016 taxable income?
A)$2,400
B)$3,350
C)$4,650
D)$4,750
E)$6,000
Q4) Federal quarterly estimate of $3,000 paid by a self-employed taxpayer.
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Chapter 9: Acquisitions of Property
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Q1) An asset's holding period normally begins on the day after it is acquired and ends on the day of its disposition.
A)True
B)False
Q2) Dana purchases an automobile for personal use for $27,000.After using it for three years,Dana converts the automobile to business use when the fair market value is $19,000.After a few months of business use,Dana sells the automobile for $18,000.What is the amount of gain or loss recognized on the sale of the automobile?
A)No gain or loss
B)$1,000 loss
C)$8,000 loss
D)$9,000 loss
E)$8,000 gain
Q3) General Telelpnone gave Wynonna $2,000 for an easement for power lines across her property.She must realize the gain or loss on the receipt of cash.
A)True
B)False
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Chapter 10: Cost Recovery on Property: Depreciation, depletion,
and Amortization
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Sample Questions
Q1) Ralph buys a new truck (5-year MACRS property)to use in his landscaping business on May 13,2016,at a cost of $18,000.On November 5,2016,Ralph takes advantage of an end of the season clearance sale to purchase various landscaping equipment (7-year MACRS property)costing $34,000.Assuming that Ralph does not wish to immediately expense any of the cost of the property purchased this year,what is his 2016 maximum allowable cost recovery deduction?
A)$2,114
B)$5,714
C)$8,459
D)$2,086
E)$15,500
Q2) What is the MACRS recovery period for a warehouse placed in service on August 31,2016?
A)10 years.
B)27.5 years.
C)31.5 years.
D)39 years.
E)40 years.
Q3) Why would a taxpayer ever elect to use the alternative depreciation system (ADS)rather than the MACRS?
Page 12
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Chapter 11: Property Dispositions
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Q1) Sybil purchased 500 shares of Qualified Small Business Stock (QSB)for $25,000 on March 2,2003.On November 29,2016,she sells the stock for $125,000.Sybil also sells 100 shares of stock she acquired two years ago realizing a gain of $20,000.Sybil has $100,000 of other income.Which of the following statements about the stock sale is/are true?
I.The tax paid on Sybil's two stock sales is $17,000.
II.The tax rate on the $20,000 gain is 15%.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Carlos received an antique dresser from his aunt.Since the dresser is worth $6,000 more than what his aunt paid for it,the holding period begins with the date of the gift.
A)True B)False
Q3) On December 1,2013,George paid $17,500 for a painting.On October 31,2015,he sells the painting for $26,750.
Q4) What incentive provisions or preferential treatments exist for capital gains?
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Page 13
Chapter 12: Non-Recognition Transactions
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Q1) Discuss the type of property that is qualified replacement property for involuntary conversion provisions for gain deferrals.
Q2) The holding period of an asset received in a like-kind exchange includes the holding period of the transferred asset.
A)True
B)False
Q3) The earliest date that condemned property can be replaced and still qualify for involuntary conversion (nonrecognition)treatment is
A)The date of the actual condemnation.
B)The date of the threat of condemnation.
C)Two years before the actual condemnation.
D)Two years before the threat of condemnation.
E)Three years after the date of the condemnation.
Q4) In general,qualified replacement property for an involuntary conversion must be purchased within one year after the close of the tax year in which the involuntary conversion occurred.
A)True
B)False
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Chapter 13: Choice of Business Entity-General Tax and
Nontax
Factorsformation
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Q1) Rosen Group has a company health-care plan for all employees.Will,an employee,owns 10% of Rosen.The cost to Rosen for Will's health plan is $2,500.What amount must Will report as income if Rosen is a Regular Corporation Partnership
A)$2,500 $2,500
B)$-0- $-0-
C)$-0- $2,500
D)$2,500 $-0-
Q2) A partner in a limited liability partnership (LLP)
I.Has no liability for acts of malfeasance of any of the other partners.
II.Has no liability for the debts of the partnership.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) Does the selection of a corporate entity ever make sense based on a desire for lower marginal tax rates? Discuss.
Page 15
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Chapter 14: Choice of Business Entity-Operations and Distributions
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Q1) With the exception of personal service and closely-held corporations,regular corporations are not subject to the passive activity rules.
A)True
B)False
Q2) Serenity receives a nonliquidating distribution from the Hickock Corporation,an S corporation.Which of the following statements concerning nonliquidating distributions from an S corporation are correct?
I.A nonliquidating cash distribution is taxable if the amount distributed exceeds Serenity's basis in Hickock.
II.The amount of the dividend on a nonliquidating distribution of property is the fair market value of the property distributed.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) Discuss two tax-planning techniques that can be used by a 100% owner-employee to reduce his/her tax liability.
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Chapter 15: Choice of Business Entity-Other Considerations
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Q1) Defined contribution plan
A)A separate, parallel tax system designed to ensure a taxpayer pays some tax.
B)A compensation tool that is based on potential price increases of the company's stock.
C)An individual trust account maintained for the exclusive benefit of an individual or beneficiary.
D)A type of defined contribution pension plan in which the company and the employee contribute a fixed percentage of the employee's salary to the plan.
E)A pension plan in which the benefits are based on the number of years an employee has worked for a company and on the employee's annual salary.
F)A pension plan whose benefits are determined by the amount of contributions the employee and the company contribute to the plan and the earnings of the plan.
Q2) Savings incentive match plan for employees (SIMPLE)were created to encourage small businesses to establish retirement plans for their employees.
A)True
B)False
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Chapter 16: Tax Research
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Q1) Which of the following regulations deals with Estate Tax?
A)Reg. Sec. 1.165-1
B)Reg. Sec. 20.2014-5
C)Reg. Sec. 25.2518-5
D)Reg. Sec. 301.7002-5
Q2) Which of the following authorities can help the taxpayer interpret a new tax law soon (i.e.during the first few months)after it becomes law?
A)Treasury Regulations.
B)Committee Reports.
C)Revenue Rulings.
D)Internal Revenue Code.
E)Court Cases.
Q3) All judicial citations follow the same format: case name,volume number of the reporter in which the case is published,name of the reporter,and the page of the reporter on which the case begins.
A)True
B)False
Q4) Describe the steps of the tax research process.
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