Principles of Taxation
Midterm Exam
Course Introduction
Principles of Taxation introduces students to the fundamental concepts and frameworks underlying tax systems, with a primary focus on income taxation. The course examines the economic, legal, and administrative principles guiding tax policy, explores different types of taxes (such as income, corporate, consumption, and property taxes), and discusses the implications of taxation on individuals, businesses, and government revenue. Topics include tax incidence, equity and efficiency, tax compliance, and the role of taxation in public finance. Through real-world examples and case studies, students will develop an understanding of how tax laws are formulated, applied, and their impact on the economy and society.
Recommended Textbook
McGraw Hills Taxation of Individuals 2018 Edition 9th Edition by Spilker Brian C
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14 Chapters
1589 Verified Questions
1589 Flashcards
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Page 2
Chapter 1: An Introduction to Tax
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Sample Questions
Q1) Regressive tax rate structures are typically considered to be vertically equitable.
A)True
B)False
Answer: False
Q2) Al believes that SUVs have negative social and environmental effects because of their increased carbon monoxide emissions.He proposes eliminating sales taxes on smaller automobiles in favor of higher sales taxes levied on SUVs.Al performs some calculations and comes to the conclusion that based on the current number of SUVs owned in the U.S.exactly the same amount of total sales tax will be collected under his reformed system.Which of the following concepts explains why Al's idea may not work?
A) The ability to pay principle.
B) Horizontal equity.
C) Substitution effect.
D) Vertical equity.
E) None of the choices are correct.
Answer: C
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Chapter 2: Tax Compliance, The IRS and Tax Authorities
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Sample Questions
Q1) Rowanda could not settle her tax dispute with the IRS at the appeals conference.If she wants to litigate the issue but does not have sufficient funds to pay the proposed tax deficiency,Rowanda should litigate in the:
A) U.S. District Court.
B) U.S. Circuit Court of Appeals.
C) U.S. Court of Federal Claims.
D) Tax Court.
E) None of the choices are correct.
Answer: D
Q2) Secondary authorities are official sources of the tax law with a lesser "weight" than primary authorities.
A)True
B)False
Answer: False
Q3) In researching a question of fact,the researcher should focus her efforts on identifying authorities with fact patterns similar to her client's facts.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Tax Planning Strategies and Related Limitations
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Sample Questions
Q1) Which of the following may limit the conversion strategy?
A) Implicit taxes.
B) Assignment of income doctrine.
C) Constructive receipt doctrine.
D) Activities with preferential tax rates.
E) None of the choices are correct.
Answer: A
Q2) The timing strategy becomes more attractive if a taxpayer is able to accelerate deductions by two or more years (versus one year).
A)True
B)False
Answer: True
Q3) Which of the following tax planning strategies is based on the present value of money?
A) timing.
B) tax avoidance.
C) income shifting.
D) conversion.
E) None of the choices are correct.
Answer: A
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Chapter 4: Individual Income Tax Overview, Exemptions, and Filing Status
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Sample Questions
Q1) Madison's gross tax liability is $9,000.Madison had $3,000 of tax credits available and she had $8,000 of taxes withheld by her employer.What is Madison's taxes due (or taxes refunded)with her tax return?
A) $0 taxes due and $0 tax refund.
B) $6,000 taxes due.
C) $2,000 tax refund.
D) $1,000 taxes due.
Q2) In June of year 1,Jake's wife Darla died.The couple did not have any children and Jake did not remarry in year 1 or year 2.Which is the most favorable filing status for Jake in year 2?
A) Married filing separately.
B) Single.
C) Head of household.
D) Qualifying widower.
Q3) A taxpayer may qualify for the head of household filing status if she has no dependent children but pays more than half of the cost of maintaining a separate household for her dependent mother and/or father.
A)True
B)False
Page 6
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Chapter 5: Gross Income and Exclusions
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Sample Questions
Q1) Trevor received a gift of $25,000 in cash from his rich uncle.Trevor must include $15,000 of this gift in his gross income this year.
A)True
B)False
Q2) Excluded income will never be subject to the federal income tax.
A)True
B)False
Q3) Which of the following statements about alimony payments is true?
A) To qualify as alimony, payments must be made in cash.
B) Alimony payments are includible in the gross income of the recipient.
C) To qualify as alimony, payments cannot continue after the death of the recipient.
D) To qualify as alimony, payments must be made under a written agreement or divorce decree that does not designate the payments as "nonalimony" or child support.
E) All of the choices are correct.
Q4) The tax law defines alimony to include transfers of property (but not cash)between former spouses.
A)True
B)False
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Page 7
Chapter 6: Individual Deductions
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Sample Questions
Q1) Larry recorded the following donations this year: $500 cash to a family in need
$2,400 to a church
$500 cash to a political campaign
To the Salvation Army household items that originally cost $1,200 but are worth $300. What is Larry's maximum allowable charitable contribution if his AGI is $60,000?
A) $2,900.
B) $1,000.
C) $2,700.
D) $4,600.
E) None of the choices are correct.
Q2) Taxpayers are allowed to deduct all ordinary and necessary expenses incurred in connection with determining their tax obligations imposed by federal authorities.
A)True
B)False
Q3) Rochelle,a single taxpayer (age 47),has an AGI of $275,200.This year,she paid medical expenses of $30,000,state income taxes of $4,000,mortgage interest of $10,600,and charitable contributions of $6,000.What would be the amount of her total itemized deductions that she may claim on her tax return?
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Chapter 7: Investments
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Sample Questions
Q1) Cory recently sold his qualified small business stock (acquired in 2017)for $90,000 after holding it for ten years.His basis in the stock is $40,000.Assuming his marginal tax rate is 35 percent,how much tax will he owe on the sale?
A) $3,750
B) $7,000
C) $7,500
D) $14,000
E) None of the choices are correct
Q2) What requirements must be satisfied before an investor may receive preferential tax treatment on dividend income,and what preferential treatment will result?
Q3) Generally,interest income is taxed at preferential capital gains rates and dividend income is taxed at ordinary rates.
A)True
B)False
Q4) Compare and contrast how interest income is reported for the following types of bonds: (a)bond originally issued at a discount,(b)bond originally issued at a premium,(c)bond purchased at a discount in a secondary market,(d)bond purchased at a premium in a secondary market.
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Page 9
Chapter 8: Individual Income Tax Computation and Tax Credits
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Sample Questions
Q1) The alternative minimum tax is the AMT base multiplied by the AMT rate.
A)True
B)False
Q2) Keith and Nicole are married filing joint with two daughters who qualify as dependents.Their gross income for 2017 is $21,100.Are they required to file a tax return? How do you know this without memorizing the gross income thresholds? In 2017,the standard deduction for taxpayers filing a joint return is $12,700 and the personal exemption is $4,050.
Q3) Kaelyn's mother,Judy,looks after Kaelyn's four-year-old twins so Kaelyn can go to work (she drops off and picks up the twins from Judy's home every day).Since Judy is a relative,Kaelyn made sure,for tax purposes,to pay her mother the going rate for child care ($6,300 for the year).What is the amount of Kaelyn's child and dependent care credit if her AGI for the year was $36,000? (Exhibit 8-9 in the text)
A) $1,440
B) $2,100
C) $6,000
D) $0
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Page 10
Chapter 9: Business Income, Deductions, and Accounting Methods
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Sample Questions
Q1) Which of the following is a true statement about travel that has both business and personal aspects?
A) Transportation costs are always fully deductible.
B) Meals are not deductible for this type of travel.
C) Only half of the cost of meals and transportation is deductible.
D) The cost of lodging, and incidental expenditures is limited to those incurred during the business portion of the travel.
E) None of the choices are correct.
Q2) The 12-month rule allows taxpayers to deduct the entire amount of certain prepaid business expenses.
A)True
B)False
Q3) Which of the following expenses are completely deductible?
A) $1,000 spent on compensating your brother for a personal expense.
B) $50 spent on meals while traveling on business.
C) $2,000 spent by the employer on reimbursing an employee for entertainment.
D) All of the expenses are fully deductible.
E) None of the expenses can be deducted in full.
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Chapter 10: Property Acquisition and Cost Recovery
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Sample Questions
Q1) Which of the following is not usually included in an asset's tax basis?
A) Purchase price
B) Sales tax
C) Shipping
D) Installation costs
E) All of the choices are included in an asset's tax basis.
Q2) Deirdre's business purchased two assets during the current year (a full 12-month tax year).Deirdre placed in service computer equipment (5-year property)on January 20 with a basis of $15,000 and machinery (7-year property)on October 1 with a basis of $15,000.Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation).(Use MACRS Table 2 in the text)(Round final answer to the nearest whole number)
A) $1,286.
B) $5,144.
C) $5,786.
D) $6,000.
E) None of the choices are correct.
Q3) Occasionally bonus depreciation is used as a stimulus tool by tax policy makers.
A)True
B)False
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Chapter 11: Property Dispositions
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Sample Questions
Q1) Residential real property is not like-kind with non-residential real property.
A)True
B)False
Q2) An asset's tax adjusted basis is usually greater than its book adjusted basis.
A)True
B)False
Q3) For corporations,§291 recaptures 20 percent of the lesser of depreciation taken or the realized gain as ordinary income.
A)True
B)False
Q4) Collins Corporation,of Camden,Maine,wants to exchange its manufacturing equipment for Rockland Company's equipment.Both parties agree that Collins's machinery is worth $200,000 and that Rockland's machinery is worth $175,000.Collins will not enter into the transaction unless it qualifies as a like-kind exchange.If Collins wants to avoid gain,what could the parties do to equalize the value exchanged but still allow the exchange to qualify as a like-kind exchange?
Q5) The adjusted basis is the cost basis less cost recovery deductions.
A)True
B)False
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Chapter 12: Compensation
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Sample
Questions
Q1) One primary purpose of equity compensation is to motivate employees.
A)True
B)False
Q2) Employees may exclude from income items such as occasional theatre tickets,t-shirts,or a Thanksgiving turkey.
A)True
B)False
Q3) Stock options will always provide employees with future compensation.
A)True
B)False
Q4) Annika's employer provides only its executives with parking benefits.The fair market value of the annual parking benefit is $4,800 ($400 per month).What is the amount Annika must include into income with respect to her parking benefit in 2017?
Q5) Which of the following is a fringe benefit that employers can discriminate among employees?
A) No additional cost service.
B) Qualified employee discount.
C) Qualified transportation fringe.
D) Employee educational assistance.
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Chapter 13: Retirement Savings and Deferred Compensation
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Sample Questions
Q1) Which of the following is not a self-employed retirement account?
A) SEP IRA.
B) SEM 403(c).
C) Individual 401(k).
D) None of the choices are correct. All of the choices are self-employed retirement accounts.
Q2) When employees contribute to a traditional 401(k)plan,they ________ allowed to deduct the contributions and they ________ taxed on distributions from the plan.
A) are; are not
B) are; are
C) are not; are
D) are not; are not
Q3) Which of the following statements concerning individual 401(k)s is false?
A) In general, individual 401(k)s have higher administrative costs than SEP IRAs.
B) Employees of the taxpayer cannot participate in individual 401(k)s.
C) Individual 401(k)s are available only to self-employed taxpayers with 100 or fewer employees.
D) Individual 401(k)s have contribution limitations.
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Chapter 14: Tax Consequences of Home Ownership
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Sample Questions
Q1) Amanda purchased a home for $1,000,000 in year 1.She paid $200,000 cash and borrowed the remaining $800,000.This is Amanda's only residence.Assume that in year 10 when the home had appreciated to $1,500,000 and the remaining mortgage was $600,000,interest rates declined and Amanda refinanced her home.She borrowed $1,000,000 at the time of the refinancing,paid off the first mortgage,and used the remainder for purposes unrelated to the home.What is her total amount of qualifying home-related debt for tax purposes?
A) $600,000.
B) $700,000.
C) $1,000,000.
D) $1,100,000.
Q2) Jorge owns a home that he rents for 360 days and uses for personal purposes for five days.Jorge is not required to allocate expenses associated with the home between rental and personal use.
A)True
B)False
Q3) A personal residence is not a capital asset.
A)True
B)False
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Page 16