Principles of Taxation
Final Test Solutions
Course Introduction
Principles of Taxation introduces students to the fundamental concepts, frameworks, and objectives of taxation within a national and global context. The course explores the rationale behind tax systems, types of taxes, tax bases, and the principles guiding effective and equitable tax policy. Students will analyze topics such as tax incidence, fairness, efficiency, and the economic impacts of taxation. The course also covers the administrative procedures, legal structures, and ethical considerations involved in tax collection and compliance, providing a comprehensive foundation for understanding how taxation influences individuals, businesses, and society as a whole.
Recommended Textbook
Concepts in Federal Taxation 2018 25th Edition by Kevin
E. Murphy
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16 Chapters
2096 Verified Questions
2096 Flashcards
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Chapter 1: Conceptual Foundations of Tax Law
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Sample Questions
Q1) Which of the following is an example of tax evasion?
A)Beth invests money in tax exempt municipal bonds instead of corporate bonds.
B)Bryan uses the cafeteria plan offered by his employer to fund pension plan contributions for his retirement.
C)Bauregard,a very wealthy 87-year-old individual,gives bonds to each of his grandchildren so that the interest income on them would be taxed at a lower tax rate.
D)Bertha won $500 cash in an amateur mud-wrestling contest but doesn't report it on her tax return.
E)All of the above are examples of tax evasion.
Answer: D
Q2) How much additional Social Security tax does Elise pay in 2017 on her $10,000 Christmas bonus? Her total earnings for the year (before the bonus)are $140,000.
A)$ 0
B)$ 145
C)$ 620
D)$ 765
Answer: B
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Chapter 2: Income Tax Concepts
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Sample Questions
Q1) Helen receives stock worth $1,000 from her grandfather as a graduation gift in May 2017 (her grandfather paid $100 for the stock many years ago).In December 2017,she receives a $100 cash dividend on the stock.Helen is not taxed on the value of the stock received in 2017,but she must include the $100 cash dividend in her 2017 gross income.Which of the following form the basis for this treatment?
I.Capital Recovery Concept.
II.Legislative Grace Concept.
III.All-inclusive Income Concept.
IV.Constructive Receipt Doctrine.
A)Statements II and III are correct.
B)Statements I and IV are correct.
C)Statements II,III,and IV are correct.
D)Statements II and IV are correct.
E)Only statement I is correct.
Answer: A
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4
Chapter 3: Income Sources
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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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Sample Questions
Q1) Cornell is a building contractor who builds 25-30 homes a year.Charlotte is a real estate broker who sells all of Cornell's homes.Charlotte has recently referred a couple to Cornell who wanted him to build a $400,000 home for them.Knowing that Charlotte and her husband enjoy skiing,he bought her a nice pair of skis and boots.
I.The "gift" appears to be a form of compensation.
II.The skis are considered a gift for income tax purposes.
III.Substance-over-form applies to this situation.
IV.Charlotte recognizes gross income from the receipt of the skis.
A)Only statement I is correct.
B)Only statement II is correct.
C)Statements I,III,and IV are correct.
D)Statements II and IV are correct.
E)Statements II,III,and IV are correct.
Q2) Dick lives rent-free in an apartment (value $675/month)in a complex where he is the apartment manager and must be on the premises to handle problems.
A)Fully excluded from gross income.
B)Fully included in gross income.
C)Partially excluded from gross income.
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Chapter 5: Introduction to Business Expenses
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Sample Questions
Q1) Twin City Manufacturing Corporation is an accrual basis taxpayer.Twin City Manufacturing provides medical insurance for its employees through a self-insured reimbursement plan.Twin City Manufacturing pays $100 per month per employee into the plan fund.The fund is then used to reimburse employees' medical expenses.During the current year,Twin City Manufacturing Corp.pays $12,000 into the fund and pays medical reimbursement claims of $10,600.
I.If Twin City Manufacturing is an accrual basis taxpayer it can deduct $12,000.
II.If Twin City Manufacturing is a cash basis taxpayer it can deduct $10,600.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Ona is a professional musician.She prepared her music teacher's tax return in exchange for music lessons.Since she is a cash basis taxpayer,she cannot take a deduction for the music lessons.
A)True
B)False
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Page 7
Chapter 6: Business Expenses
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Sample Questions
Q1) Associated with
A)Not deductible.
B)Short-term capital loss.
C)Limited to $25 per person.
D)Deductible as an ordinary loss
E)Only 50% of the cost is deductible.
F)Must be away from tax home overnight to be deductible.
G)General area where a taxpayer conducts principal activity.
H)If the "directly-related" test fails;this test may allow the deduction.
Q2) Discovery,Inc. ,a cash-basis consulting firm,can deduct a twelve-month insurance premium in the year the premium is paid even though the policy remains in effect into the following year.
A)True
B)False
Q3) In 2017,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
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Page 8
Chapter 7: Losses -- Deductions and Limitations
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Sample Questions
Q1) If a corporation incurs a net operating loss,what would cause it to elect to carry the loss forward and forsake the carryback? Explain.
Q2) Which of the following is true concerning capital losses and net operating losses for corporations:
Capital loss Net operating loss
A)Carried back 5 years Carried back 2 years
B)Carried back 5 years Carried forward 20 years
C)Carried back 3 years Carried forward 20 years
D)Carried back 5 years Carried forward 5 years
E)Carried back 3 years Carried forward 5 years
Q3) A corporation has a net capital loss.The significance of a net capital loss in 2016 for a corporation is that it can be carried back 3 years and carried forward 5 years by a corporation to offset capital gains in other taxable years.
A)True
B)False
Q4) Discuss the difference(s)between the real estate professional exception and the active participation exception when dealing with rental properties.
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Chapter 8: Taxation of Individuals
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Sample Questions
Q1) To qualify for the child- and dependent-care credit,the taxpayer must have earned income and must incur qualified expenses for the care of qualified individuals.
A)True
B)False
Q2) Canfield is single,70 years old,and has no dependents.Canfield will not have to file a tax return in 2017 if:
I.his gross income does not exceed $11,900.
II.his only income is $4,000 of self-employment income.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) Hobby expenses of $2,500.Hobby income is $2,000.Amount $2,000,subject to 2% of AGI
A)Not Deductible
B)Deductible - For AGI
C)Deductible - From AGI
Q4) Explain the support test and the gross income test to be a qualifying relative.
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Chapter 9: Acquisitions of Property
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Sample Questions
Q1) Determine the proper classification(s)of a house owned and used by John as his principal residence.
I.Personal use property.
IV.Intangible property.
II.Business use property.
V.Real estate.
III.Tangible property.
VI.Personal property.
A)Statements I,III,and V are correct.
B)Statements I,III,and VI are correct.
C)Only statement I and V are correct.
D)Only statement V is correct.
E)Only statement I is correct.
Q2) Whenever the donor's adjusted basis is used to compute a gain or loss on the donee's disposition of property received by gift,the donee's holding period is always the period of time the property was owned by the donee only.
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) Under the computation of the alternative minimum tax,the Alternative Depreciation System may be used but is not required.
A)True
B)False
Q2) Which of the following assets would not be allowed a depreciation deduction?
I.A business computer used to process payroll and maintain a company's general ledger.
II.A personal residence of a taxpayer.
III.A building rented out for the production of rental income.
IV.A yacht rented to a fishing party.
A)Only statement II is correct.
B)Statements II and IV are correct.
C)Only statement I is correct.
D)Statements I and III are correct.
E)All of the assets are depreciable.
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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Sample Questions
Q1) What incentive provisions or preferential treatments exist for capital gains?
Q2) Tonya purchased 500 shares of Home Depot,Inc.common stock on December 13,2014,at a cost of $3,600.She paid a commission of $150 on the purchase.On February 18,2016,she received 250 shares of Home Depot,Inc.common stock as a tax-free dividend.Tonya sells 600 shares for $3,700 on January 8,2017,and pays a $100 commission on the sale.Tonya's gain (loss)on the sale is characterized as:
A)Long-term capital gain of $600.
B)Long-term capital gain of $500;short-term capital gain of $100.
C)Long-term capital loss of $50.
D)Short-term capital gain of $600.
Q3) Allie,a well-known artist,gave one of her paintings to her nephew Alfred.When Alfred sells the painting he will have a capital gain.
A)True
B)False
Q4) Gains on the sale of certain types of business assets,referred to as Section 1231 property,are always treated as capital gains.
A)True
B)False
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Page 13
Chapter 12: Nonrecognition Transactions
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Sample Questions
Q1) Coke-Cola bonds for General Foods bonds.
A)qualifies as a like-kind exchange
B)does not qualify as a like-kind exchange
Q2) An airplane for a duplex apartment.
A)qualifies as a like-kind exchange
B)does not qualify as a like-kind exchange
Q3) Norman exchanges a machine he uses in his pool construction business for a used machine worth $6,000 to use in the same business.He purchased the machine 3 years ago for $22,000 and had taken depreciation of $9,000 on the machine.In the exchange,Norman also receives $3,000 of cash.As a result of the exchange,
I.Norman realizes a loss of $4,000 on the exchange.
II.Norman's basis in the acquired machine is $13,000.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q4) The recognition of a loss realized on an involuntary conversion is mandatory.
A)True
B)False
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Chapter 13: Choice of Business Entity -- General Tax and
Nontax Factorsformation
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Sample Questions
Q1) Gomer is admitted to the Mouton Partnership on July 1,2017.Gomer contributes ABC common stock purchased in 1991 for $20,000 with a fair market value of $100,000 on July 1,2017,for a 25% interest in the partnership.After Gomer's admission to the partnership,Mouton's net asset fair market value is $400,000.What is Gomer's taxable gain or income due to the exchange of ABC stock for the Mouton Partnership interest?
A)$- 0 -
B)$80,000 long-term capital gain.
C)$80,000 ordinary income.
D)$80,000 short-term capital loss.
E)$100,000 ordinary income.
Q2) Limited liability refers to
A)whether the entity ceases to exist with a change in ownership.
B)who manages the entity.
C)whether the owners are risking any more than they invested in the firm.
D)the ease with which ownership can be transferred.
Q3) Discuss the characteristics of a personal service corporation (PSC).
Q4) Discuss what limited liability means.What type of entity (or entities)offers this characteristic to its owners? What type(s)of entity (or entities)do not provide this characteristic?
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Chapter 14: Choice of Business Entity -- Operations and Distributions
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Q1) At the beginning of the current year,Harrison's adjusted basis in FLM Partnership is $50,000.During the year,Harrison receives a cash distribution of $25,000.How much income must Harrison recognize because of the cash received?
A)$- 0 -
B)$10,000
C)$15,000
D)$20,000
E)$25,000
Q2) Roger owns 65% of Silver Trucking,a partnership.During the current year,Roger sells a truck with an adjusted basis of $30,000 to Silver for $20,000.
I.Silver's basis in the truck is $30,000.
II.Roger can deduct the $10,000 loss on the sale of the truck.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
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Chapter 15: Choice of Business Entity -- Other Considerations
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Sample Questions
Q1) Under a Roth IRA
I.Any taxpayer may contribute and deduct up to $5,500 deductible contributions per year.
II.The maximum contribution is phased-out for unmarried taxpayers with adjusted gross income between $118,000 and $133,000.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Amanda is an employee of the Kiwi Corporation with a yearly salary of $80,000.The company maintains a noncontributory profit-sharing plan.During the year the company contributes $24,000 to the plan on her behalf in recognition of her outstanding work.The Kiwi Corporation is subject to an excess contribution penalty of
A)$-0-
B)$400
C)$1,000
D)$2,000
E)$3,750
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Chapter 16: Tax Research
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Sample Questions
Q1) Title 26 of the United States Code is commonly referred to as the Internal Revenue Code.
A)True
B)False
Q2) Rewrite each of the following citations in proper form:
a.Subsection (b)of the third treasury regulation issued under Code Section 614 (Income Tax).
b.Revenue Ruling 72-151,found on page 88 of the second cumulative bulletin of 1972.
c.Metropolitan Laundry Co. ,case 52-1 USTC 9129 Vol 100 Federal Supplement at page 803 District Court of California.
d.Henry M.Rodney (Tax Court 1969),volume 53 Reports of the U.S Tax Court,page 287.
e.Paragraph 3 of subsection b,Section 217 of the Internal Revenue Code of 1986.
Q3) A nonacquiescence
A)is issued when the IRS wins a court case.
B)is issued by the Joint Committee on Taxation.
C)means that the IRS disagrees with a decision of the court.
D)means that the IRS will follow the decision in similar situations.
Q4) Describe the steps of the tax research process.
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