Principles of Taxation Practice Questions
Course Introduction
Principles of Taxation provides a comprehensive overview of the fundamental concepts, principles, and practices underlying modern tax systems. The course explores the rationale for taxation, types of taxes, and the economic, legal, and administrative frameworks that guide tax policy and implementation. Students learn about core topics such as tax incidence, equity, efficiency, tax evasion and avoidance, and the impact of taxation on individual and corporate decision-making. By examining case studies and real-world examples, students gain practical insights into tax compliance, tax planning, and the broader social and economic implications of taxation in both domestic and international contexts.
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) Scott files his tax return 65 days after the due date.Along with the return,Scott remits a check for $50,000 which is the balance of the tax owed.Disregarding the interest element,Scott's total failure to file and to pay penalties are:
A) $8,250.
B) $7,500.
C) $6,000.
D) $750.
E) None of the above.
Answer: B
Q2) Two months after the burglary of his personal residence,Eric is audited by the IRS.Among the items taken in the burglary was a shoe box containing approximately $50,000 in cash.Eric is the owner and operator of a cash-and-carry liquor store.Eric wonders why he was audited.Can you help explain?
Answer: Although Eric's audit by the IRS could be the result of sheer chance,this appears unlikely.Press coverage of the burglary,particularly if the items stolen were enumerated,could have put the IRS on notice.Why would anyone keep such a large amount of cash at his personal residence? Also,Eric is in a business where tax evasion is easily accomplished.
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Chapter 2: Working With the Tax Law
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Q1) Revenue Rulings issued by the National Office of the IRS carry the same legal force and effect as Regulations.
A)True
B)False
Answer: False
Q2) Which court decision carries more weight?
A) Federal District Court.
B) Fifth Circuit Court of Appeals.
C) Memorandum U.S. Tax Court decision.
D) Small Cases Division of U.S. Tax Court.
E) U.S. Court of Federal Claims.
Answer: B
Q3) What is the role of the Joint Conference Committee in the legislative process?
Answer: When the Senate version of a bill differs from that passed by the House,the Joint Conference Committee,which includes members of both the House Ways and Means Committee and the Senate Finance Committee,is called upon to resolve the differences.The deliberations of the Joint Conference Committee usually produce a compromise between the two versions,which is then voted on by both the House and the Senate.If both bodies accept the bill,it is referred to the President for approval or veto.
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Chapter 3: Tax Formula and Tax Determination; an
Overview of Property Transactions
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Q1) During the year,Kim sold the following assets: business auto for a $1,000 loss,stock investment for a $1,000 loss,and pleasure yacht for a $1,000 loss.Presuming adequate income,how much of these losses may Kim claim?
A) $0.
B) $1,000.
C) $2,000.
D) $3,000.
E) None of the above.
Answer: C
Q2) A child who has unearned income of $1,900 or less cannot be subject to the kiddie tax.
A)True
B)False
Answer: True
Q3) Butch and Minerva are divorced in December of 2012.Since they were married for more than one-half of the year,they are considered asmarried for 2012.
A)True
B)False
Answer: False
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) The constructive receipt doctrine requires that income must be recognized when it is made available to the cash basis taxpayer,although it has not been actually received.The constructive receipt doctrine does not apply to accrual basis taxpayers.
A)True
B)False
Q2) Mabel is age 65 and lives on her Social Security benefits and gifts from her son,Fred.Fred is a full-time teacher.He has written a book and receives royalties from it.This year Fred directed the publisher to make the royalty check payable to Mabel because she needs the money for support.Mabel must include the amount of the royalty check in her gross income.
Q3) Theresa,a cash basis taxpayer,purchased a bond on July 1,2009,for $10,000,plus $400 of accrued interest.The bond paid $800 of interest each December 31.On March 31,2012,she sold the bond for $10,300,which included $200 of accrued interest.
A) Theresa's 2012 interest income from the bond is $200.
B) Theresa has $200 of interest income and a $100 gain from the bond in 2012.
C) Theresa has a $100 loss from the sale of the bond and no interest income.
D) Theresa's gain on the sale of the bond is $200.
E) None of the above.
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Chapter 5: Gross Income: Exclusions
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Q1) Sarah's employer pays the hospitalization insurance premiums for a policy that covers all employees and retired former employees.After Sarah retires,the hospital insurance premiums paid for her by her employer can be excluded from her gross income.
A)True
B)False
Q2) Assuming a taxpayer qualifies for the exclusion treatment,the interest income on educational savings bonds:
A) Is gross income to the person who purchased the bond in the year the interest is earned.
B) Is gross income to the student in the year the interest is earned.
C) Is included in the student's gross income in the year the savings bonds are sold or redeemed to pay educational expenses.
D) Is not included in anyone's gross income if the proceeds are used to pay college tuition.
E) None of the above.
Q3) What Federal income tax benefits are provided for college students?
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Chapter 6: Deductions and Losses: in General
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Q1) If a vacation home is classified as primarily rental use,a deduction for all of the rental expenses is allowed.
A)True
B)False
Q2) Because Scott is three months delinquent on the mortgage payments for his personal residence,Jeanette (his sister)is going to cover the arrearage.Based on past experience,she does not expect to be repaid by Scott.Which of the following statements is correct?
A) If Scott receives the money from Jeanette and pays the mortgage company, Jeanette can deduct the interest part.
B) If Jeanette pays the mortgage company directly, neither Scott nor Jeanette can deduct the interest part.
C) If Jeanette pays the mortgage company directly, she cannot deduct the interest part.
D) Only b. and c. are correct.
E) a., b., and c. are correct.
Q3) For a vacation home to be classified in the primarily rental use category,what attributes must be present?
Q4) 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) The amount of partial worthlessness on a nonbusiness bad debt is deducted in the year partial worthlessness is determined.
A)True
B)False
Q2) The excess of nonbusiness capital gains over nonbusiness capital losses must be added to taxable income to compute the net operating loss of an individual.
A)True
B)False
Q3) A loss from a worthless security is always treated as a short-term capital loss.
A)True
B)False
Q4) A bona fide debt cannot arise on a loan between father and son.
A)True
B)False
Q5) Identify the factors that should be considered in determining whether a transaction is a business bad debt or a nonbusiness bad debt.
Q6) How is qualified production activities income (QPAI)calculated?
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Q7) Why was the domestic production activities deduction (DPAD)enacted by Congress?
Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Q1) On March 1,2012,Lana leases and places in service a passenger automobile.The lease will run for five years and the payments are $500 per month.During 2012,she uses her car 40% for business and 60% for personal activities.Assuming the dollar amount from the IRS table is $110,determine Lana's deduction for the lease payments.
A) $0.
B) $1,800.
C) $2,000.
D) $2,330.
E) None of the above.
Q2) Under the alternative depreciation system (ADS),the half-year convention must be used for personalty.
A)True
B)False
Q3) Percentage depletion enables the taxpayer to recover more than the cost of an asset.
A)True
B)False
Q4) Discuss the difference between the half-year convention and the mid-quarter convention.
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) One of the tax advantages of being self-employed (rather than being an employee)is:
A) The self-employment tax is lower than the Social Security tax.
B) The cutback adjustment does not apply.
C) Job-related expenses are deductions for AGI.
D) The actual cost method for deducting the business use of an automobile can be selected.
E) A deduction for an office in the home is available.
Q2) A taxpayer who lives and works in Kansas City is sent to Chicago on an eight-day business trip.While in Chicago,taxpayer uses the hotel valet service to have some laundry done.The valet charge is a deductible travel expense.
A)True
B)False
Q3) In May 2012,after 11 months on a new job,Ken is fired after he assaults a customer.Ken must include in his gross income for 2012 any deduction for moving expenses he may have claimed on his 2011 tax return.
A)True
B)False
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) During the current year,Maria and her three dependent children had annual physical exams,which cost $750,and dental checkups for all four of them,which cost $420.In addition,Maria paid $800 for medically supervised treatments to enable her to stop smoking.After she stopped smoking,she began to gain weight and incurred $1,200 in costs for a medically supervised weight loss program.Which of these expenses qualify for the medical deduction?
Q2) Phillip developed hip problems and was unable to climb the stairs to reach his second-floor bedroom.His physician advised him to add a first-floor bedroom to his home.The cost of constructing the room was $32,000.The increase in the value of the residence as a result of the room addition was determined to be $17,000.In addition,Phillip paid the contractor $5,500 to construct an entrance ramp to his home and $8,500 to widen the hallways to accommodate his wheelchair.Phillip's AGI for the year was $100,000.How much of these expenditures can Phillip deduct as a medical expense?
A) $14,000.
B) $15,000.
C) $21,500.
D) $29,000.
E) None of the above.
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Chapter 11: Investor Losses
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Q1) In the current year,Lucile,who has AGI of $70,000 before considering rental activities,is active in three separate real estate rental activities and is in the 28% tax bracket.She had $15,000 of losses from Activity A,$25,000 of losses from Activity B,and income of $20,000 from Activity
A. Calculate her deductions and credits currently allowed and the suspended losses and credits.
C. She also had $3,100 of tax credits from Activity
Q2) Last year,Wanda gave her daughter a passive activity (adjusted basis of $80,000; fair market value of $160,000)with suspended losses of $20,000.In the current year,her daughter realizes income of $10,000 from the activity.What are the tax effects to Wanda and her daughter?
Q3) Sarah purchased for $100,000 a 10% interest in a business venture that is not subject to the passive activity rules.During the first year,her share of the entity's loss was $120,000.At the beginning of the second year,the entity obtained $800,000 of recourse financing.During the second year,Sarah withdrew cash of $20,000,and her share of the entity's loss was $25,000.Calculate the amount of loss that Sarah may claim in each of the two years and determine her at-risk amount at the end of each year.
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) Julia's tentative AMT is $94,000.Her regular income tax liability is $72,000.Julia's AMT is $22,000.
A)True
B)False
Q2) In 2012,Amber had a $100,000 loss on a passive activity.None of the loss is attributable to AMT adjustments or preferences.She has no other passive activities.Which of the following statements is correct?
A) In 2012, Amber can deduct $100,000 for regular income tax purposes and for AMT purposes.
B) Amber will have a $100,000 tax preference in 2012 as a result of the passive activity.
C) For regular income tax purposes, none of the loss is allowed in 2012.
D) In 2012, Amber will have a positive adjustment of $25,000 as a result of the passive loss.
E) None of the above.
Q3) The AMT can be calculated using either the direct or the indirect approaches.Both the tax law and the tax forms use the direct approach.
A)True
B)False
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Chapter 13: Tax Credits and Payment Procedures
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Q1) An eligible taxpayer may elect to receive advance payments of the earned income credit from his or her employer.
A)True
B)False
Q2) A taxpayer may qualify for the credit for child and dependent care expenses if the taxpayer's dependent is age 13 or less.
A)True
B)False
Q3) 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.
Q4) Discuss the treatment of unused general business credits.
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Q1) Which of the following statements is correct?
A) Under no circumstances does part of the stock basis have to be allocated to nontaxable stock rights.
B) If the fair market value of stock rights is equal to at least 15% of the fair market value of the stock, part of the stock basis must be allocated to nontaxable stock rights.
C) An election may be made to allocate part of the stock basis to nontaxable stock rights only if the fair market value of the nontaxable stock rights is at least 15% of the fair market value of the stock.
D) Only b. and c. are correct.
E) Only a. and c. are correct.
Q2) 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
Q3) Define a bargain purchase of property and discuss the related tax consequences.
Q4) Explain how the sale of investment property at a loss to a brother is treated differently from a sale to a nephew.
Page 16
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) Agnes,a calendar year taxpayer,lists her principal residence with a realtor on January 7,2012,enters into a contract to sell on March 5,2012,and sells (i.e.,the closing date)the residence on May 15,2012.The realized gain on the sale is $240,000.Which date is the appropriate ending date in determining if the residence has been owned and used by the taxpayer as the principal residence for at least two years during the prior five-year period?
A) January 7, 2012.
B) March 5, 2012.
C) May 15, 2012.
D) December 31, 2012.
E) None of the above.
Q2) The exchange of unimproved real property located in Topeka (KS)for improved real property located in Atlanta (GA)does not qualify as a like-kind exchange.
A)True
B)False
Q3) Discuss the treatment of realized gains from involuntary conversions.
Q4) How does the replacement time period differ for the condemnation of real property used in a trade or business or held for investment when compared with that for other involuntary conversions?
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) Virgil was leasing an apartment from Marple,Inc.Marple paid Virgil $1,000 to cancel his lease and move out so that Marple could demolish the building.As a result:
A) Virgil has a $1,000 capital gain.
B) Virgil has a $1,000 capital loss.
C) Marple has a $1,000 capital loss.
D) Marple has a $1,000 capital gain.
E) None of the above.
Q2) Marvin is in the business of song writing.He writes jingles for web ads.He writes a song and sells it for a lump sum.He has:
A) Sold a capital asset.
B) Sold an ordinary asset.
C) No gain or loss.
D) An ordinary gain.
E) b. and d.
Q3) Short-term capital gain is eligible for a special tax rate only when it exceeds long-term capital gain.
A)True
B)False
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Chapter 17: Property Transactions: Section 1231 and Recapture Provisions
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Q1) Which of the following statements is correct?
A) When depreciable property is gifted to another individual taxpayer, the depreciation recapture potential is extinguished.
B) When depreciable property is inherited by a taxpayer, the depreciation recapture potential is extinguished.
C) When corporate depreciable property is distributed as a dividend, the depreciation recapture potential is generally not recognized.
D) When depreciable property is contributed to charity, the depreciation recapture potential has no effect on the amount of the charitable contribution deduction.
E) All of the above are correct.
Q2) Vertigo,Inc.,has a 2012 net § 1231 loss of $64,000 and had a $32,000 net § 1231 gain in 2011.For 2012,Vertigo's net § 1231 loss is treated as:
A) Ordinary loss.
B) Ordinary gain.
C) Capital loss.
D) Capital gain.
E) None of the above.
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Chapter 18: Accounting Periods and Methods
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Q1) Pedro,not a dealer,sold real property that he owned with an adjusted basis of $120,000 and encumbered by a mortgage for $56,000 to Pat in 2010.The terms of the sale required Pat to pay $28,000 cash,assume the $56,000 mortgage,and give Pedro eleven notes for $12,000 each (plus interest at the Federal rate).The first note was payable two years from the date of sale and each succeeding note became due at two-year intervals.Pedro did not "elect out" of the installment method for reporting the transaction.If Pat pays the 2012 note as promised,what is the recognized gain to Pedro in 2012 (exclusive of interest)?
A) $12,000.
B) $7,200.
C) $4,800.
D) $0.
E) None of the above.
Q2) A C corporation in the manufacturing business must use a calendar year as its tax year unless the corporation has a business reason for using a tax year that is not a calendar year.
A)True
B)False
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Chapter 19: Deferred Compensation
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Q1) Yvonne exercises incentive stock options (ISOs)for 100 shares of Apple Corporation stock at the option price of $100 per share on May 21,2012,when the fair market value is $120 per share.She holds the stock for only seven months and sells the shares for $140 per share.Determine the recognized gain on the sale and classify it as capital or ordinary.
A) $2,000 ordinary income and $2,000 STCG.
B) $2,000 ordinary income and $2,000 LTCG.
C) $4,000 ordinary income.
D) $4,000 LTCG.
E) None of the above.
Q2) What is the maximum amount Velvia can contribute to a Coverdell Education Savings Account (CESA)on behalf of a grandson in 2012? She is single with an AGI of $99,000.
A) $0.
B) $500.
C) $1,467.
D) $2,000.
E) None of the above.
Q3) What is a highly compensated employee?
Q4) What is a defined contribution plan?
Page 21
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Chapter 20: Corporations and Partnerships
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Q1) Jerry is the sole shareholder of Bluejay Corporation,a calendar year C corporation.As of January 1,2012,Bluejay has a deficit of $50,000 in accumulated E & P.During 2012,it has current E & P of $300,000 and distributes a cash dividend of $400,000 to its shareholder.As of January 1,2012,Jerry's basis in the Bluejay stock is $75,000.One result of these transactions is:
A) Dividend income to Jerry of $250,000.
B) Dividend income to Jerry of $300,000.
C) Dividend income to Jerry of $400,000.
D) As of January 1, 2013, Bluejay Corporation has a deficit in accumulated earnings and profits of $150,000.
E) None of the above.
Q2) Which of the following rules are the same as to the income taxation of individuals and C corporations?
A) Recapture of depreciation on real property (§ 1250).
B) Excess long-term capital losses are carried over as short-term capital losses.
C) Dividends received deduction.
D) Due date for filing the Federal income tax return.
E) None of the above.
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