Principles of Taxation Study Guide Questions
Course Introduction
Principles of Taxation introduces students to the fundamental concepts and frameworks that underpin modern tax systems, focusing on the rationale, structure, and economic and social impacts of taxation. The course explores various types of taxes, including income, consumption, and property taxes, as well as the principles of equity, efficiency, and simplicity in tax policy design. Students will analyze how tax laws are formulated, the roles of government and taxpayers, and the implications of taxation for individuals, businesses, and society. By the end of the course, learners will be equipped with a foundational understanding of tax concepts, compliance requirements, and the ethical considerations in taxation.
Recommended Textbook
Pearsons Federal Taxation 2018 Individuals 31st Edition by Timothy J. Rupert
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18 Chapters
2328 Verified Questions
2328 Flashcards
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Chapter 1: An Introduction to Taxation
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Sample Questions
Q1) Jose dies in the current year and has a gross estate valued at $8,000,000.Over the past ten years Jose had made taxable gifts of $400,000.The estate incurs funeral and administrative expenses of $100,000 and also pays off Jose's debts which amount to $300,000.Jose bequeaths $500,000 to his wife.What is the amount of Jose's tax base,the amount on which the estate tax is computed?
A) $7,100,000
B) $7,500,000
C) $1,650,000
D) $2,050,000
Answer: B
Q2) Which of the following taxes is proportional?
A) gift tax
B) income tax
C) sales tax
D) Federal Insurance Contributions Act (FICA)
Answer: C
Q3) Regressive tax rates decrease as the tax base increases.
A)True
B)False
Answer: True
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Chapter 2: Determination of Tax
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Sample Questions
Q1) Cheryl is claimed as a dependent on her parents' tax return.She had a part-time job during 2017 and earned $4,900 during the year,in addition to $600 of interest income.What is her standard deduction?
A) $1,050
B) $4,900
C) $5,250
D) $6,350
Answer: C
Q2) Form 4868,a six-month extension of time to file,allows a taxpayer to A) avoid interest on underpayment of taxes due.
B) extend the filing date of the return as well as payment of the tax due.
C) extend the filing date of the return but the estimated amount of tax due must still be paid by the original due date of the return.
D) extend the filing date only at the discretion of the IRS.
Answer: C
Q3) A qualifying child of the taxpayer must meet the gross income test.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Gross Income: Inclusions
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Sample Questions
Q1) While certain income of a minor is taxed at the parent's tax rate,discuss how income shifting may still be accomplished and any constraints that may exist on income shifting.
Answer: 1.Children may own stock in the family business.Dividends may be distributed to the children,but these may be taxed at the parents' rates.
2.A child may work in the family business.Income earned by the child would be taxed at the child's tax rate.Income earned by the child would be subject to reasonable compensation limits.
3.Series EE U.S.savings bonds may be purchased in the child's name to mature after the child reaches age 24.A gift of the bonds to the child may be subject to gift tax.
Q2) Adanya's marginal tax rate is 39.6% and she is trying to decide whether to invest in tax-exempt bonds which pay 5% interest or taxable bonds paying 7% interest.The bonds have equivalent risk.Which of the bonds would yield the highest amount of income after taxes?
Answer: The taxable bonds yield 4.23% after-tax [.07 - (1-.396)],so she should invest in the tax-exempt bonds.
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Chapter 4: Gross Income: Exclusions
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Sample Questions
Q1) For a taxpayer who is not insolvent nor under bankruptcy proceedings,the discharge of debt is generally
A) taxable.
B) nontaxable.
C) partially taxable.
D) None of the above.
Q2) Amounts withdrawn from qualified tuition plans are tax-free if the amounts are used for qualified higher education expenses including tuition,fees,books,and room and board for students attending on at least a half-time basis.
A)True
B)False
Q3) Mae Li is beneficiary of a $70,000 insurance policy on her father's life.Upon his death,she elects to receive the proceeds in installments from the insurance company that carries the policy.She will receive $16,000 per year for five years.What are the tax consequences each year?
A) All $16,000 each year is taxable.
B) $10,000 interest is taxable in the first year.
C) There is no taxable income.
D) $2,000 of the $16,000 payment is taxable each year.
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Page 6
Chapter 5: Property Transactions: Capital Gains and Losses
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Sample Questions
Q1) Josh purchases a personal residence for $278,000 but subsequently converts the property to rental property when its FMV is $275,000.Assume depreciation of $65,000 has been deducted after conversion to rental use.If Josh sells the property for $280,000,his gain or loss will be
A) $2,000 gain.
B) $5,000 gain.
C) $67,000 gain.
D) $70,000 gain.
Q2) Empire Corporation purchased an office building for $500,000 cash on April 1.Prior to renting it out to tenants on July 1,Empire spent $200,000 on materials and labor to renovate the property.It funded $50,000 of the renovation cost with its own funds and borrowed the remaining $150,000.As of July 1,$2,000 of interest had been paid to the bank,but none of the principal had been repaid.The basis of the building on July 1 is
A) $500,000.
B) $700,000.
C) $702,000.
D) $502,000.
Q3) What are arguments for and against preferential treatment of capital gains?
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Chapter 6: Deductions and Losses
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Sample Questions
Q1) According to the tax formula,individuals can deduct the greater of for AGI deductions or from AGI deductions.
A)True
B)False
Q2) Points paid in connection with the purchase of a principal residence may be deducted in the year paid.
A)True
B)False
Q3) The vacation home limitations of Section 280A may also apply to boats and mobile homes.
A)True
B)False
Q4) Diane,a successful accountant with an annual income of $150,000,also enjoys raising and training race horses,an activity in which she spends about 10 hours per week.Over the past five years her winnings from races have amounted to $20,000.She employs neighborhood children to feed the horses but has a professional trainer who works with the horses about 5 hours per week.Discuss some of the factors that might enter into the determination of whether or not this activity is a hobby or a trade/business.
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Chapter 7: Itemized Deductions
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Sample Questions
Q1) Explain under what circumstances meals and lodging en route to a medical facility may be deductible.
Q2) Christa has made a $25,000 pledge to the American Red Cross (a public charity).Christa expects AGI of $200,000 this year.Which of the following assets should she donate?
A) $25,000 of cash
B) stock purchased three years ago for $18,000 with a current FMV of $25,000
C) stock purchased six months ago for $28,000 with a current FMV of $25,000
D) Christa should be indifferent among the three choices.
Q3) Sacha purchased land in 2010 for $35,000 that she held as a capital asset.This year,she contributed the land to the Boy Scouts of America (a charitable organization) for use as a site for a summer camp.The market value of the land at the date of contribution is $40,000.Sacha's adjusted gross income is $90,000.Assuming no special elections,Sacha's maximum deductible contribution this year is
A) $13,000.
B) $27,000.
C) $35,000.
D) $40,000.
Q4) Explain how tax planning may allow a deduction of qualified medical expenses.
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Chapter 8: Losses and Bad Debts
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Sample Questions
Q1) Which of the following expenses or losses could create a net operating loss for an individual taxpayer?
A) large losses on sales of investment assets
B) an operating loss from a sole proprietorship
C) large charitable contributions
D) all of the above
Q2) One of the requirements which must be met for stock to be considered Section 1244 stock is that the corporation cannot have more than $10 million of total capital and paid in surplus as of the stock issuance.
A)True
B)False
Q3) The amount realized by Matt on the sale of property to Caitlin includes all of the following with the exception of
A) cash received by Matt.
B) mortgage on the property that is assumed by Caitlin.
C) mortgage on the property paid off by Matt prior to the sale.
D) the FMV of any other property received by Matt in the transaction.
Q4) Businesses can recognize a loss on abandoned property.What types of factors would indicate that property had been abandoned?
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Chapter 9: Employee Expenses and Deferred Compensation
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Sample Questions
Q1) Which of the following situations will disqualify a taxpayer from taking a deduction for moving expenses?
A) Pam moves from Phoenix to Los Angeles to take a new job. She works at the Los Angeles job for 45 weeks before starting a new job in Las Vegas.
B) Paul moves from Boston to Miami to start a new business selling t-shirts. The business is not successful and Paul returns to Boston after 52 weeks.
C) Phyllis moves from Seattle to San Francisco to open a coffee bar. She still owns the coffee bar and lives in San Francisco 90 weeks after her move.
D) Marva moves from Dallas to Washington, DC, in her job as an IRS agent. She is still working at the IRS Washington office after one year.
Q2) If an individual is not "away from home," expenses related to local transportation are never deductible.
A)True
B)False
Q3) Johanna is single and self-employed as a technology consultant.She wants to set money aside for her retirement.What tax and financial issues should she consider?
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Page 11
Chapter 10: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) Paul bought a computer for $15,000 for business use on March 18,2015.This was his only purchase for that year.Paul used the most accelerated depreciation method available,but did not elect Sec.179.Bonus depreciation was not available.Paul sells the machine in 2017.The depreciation on the computer for 2017 is A) $0.
B) $1,440.
C) $1,500.
D) $2,880.
Q2) When a taxpayer leases an automobile for 100% business purposes,the entire lease payment is deductible.
A)True
B)False
Q3) If a new luxury automobile is used 100% for business and placed in service in 2016,the maximum MACRS depreciation on the vehicle for 2017 is $11,160.
A)True
B)False
Q4) Why would a taxpayer elect to capitalize and amortize intangible drilling costs (IDCs) rather than expense such costs?
Page 12
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Chapter 11: Accounting Periods and Methods
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Sample Questions
Q1) A cash-basis lawyer purchases an office building to use in her legal practice.To acquire the mortgage,the taxpayer must pay $5,000 in points.The taxpayer will deduct the points in the year paid.
A)True
B)False
Q2) For tax purposes,the lower of cost or market method must ordinarily be applied to each separate inventory item.
A)True
B)False
Q3) In 2017,Modern Construction Company entered into a contract to construct a building for $5,000,000.The estimated cost to complete the building is $4,000,000 and the project will be completed in 2018.Modern incurred actual construction costs of $1,600,000 and $1,800,000 in 2017 and 2018,respectively.How much gross profit is recognized using the percentage-of-completion method in 2017 and 2018?
Q4) Inventory may be valued on the tax return at the lower of cost or market unless A) replacement cost is higher than historical cost.
B) the taxpayer determines inventory cost using the LIFO method.
C) the taxpayer determines inventory cost using the FIFO method.
D) the cash method of accounting is used by the taxpayer.
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Chapter 12: Property Transactions: Nontaxable Exchanges
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Sample Questions
Q1) James and Ellen Connors,who are both 50 years old and married,sell their personal residence on July 25,2017,for $950,000.They have lived in the home for 20 years.The basis of the home is $350,000.They purchased a new home for $1,000,000 in August 2017.After living in that home for 219 days,the Connors were forced to sell their new home in 2018 for $1,300,000 and move to another climate due to Ellen's severe health problems.
a.What is the amount of gain recognized on the home sale in 2017?
b.What is the amount of the gain recognized on the home sale in 2018?
Q2) All of the following qualify as a like-kind exchange except
A) an apartment building held for investment for a warehouse used in a trade or business.
B) a printer used in trade or business for a computer used in trade or business.
C) improved real estate held for investment for unimproved real estate held for investment.
D) an airplane used in trade or business for a high-rise construction crane used in trade or business.
Q3) For purposes of nontaxable exchanges,cash and non-like-kind property constitute boot.
A)True
B)False
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Chapter 13: Property Transactions: Sec1231 and Recapture
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Sample Questions
Q1) Emma owns a small building ($120,000 basis and $123,000 FMV) and equipment ($35,000 basis and $22,000 FMV).Both assets were acquired three years ago,are used in Emma's business,and are depreciated using straight-line depreciation.Both are destroyed by fire.Insurance proceeds were equal to their FMVs.Only one other transfer of an asset occurs during the year,and a $3,000 LTCL is recognized.After considering all transactions,the tax result to Emma is a
A) $13,000 NLTCL.
B) $13,000 ordinary loss.
C) $3,000 LTCG; $3,000 LTCL; and $13,000 ordinary loss.
D) $10,000 net ordinary loss and a $3,000 NLTCL.
Q2) A building used in a business for more than a year is sold.Sec.1250 will not cause depreciation recapture if
A) the building is fully depreciated.
B) the building was placed in service after 1986.
C) straight-line depreciation was used.
D) All of the above.
Q3) What is the purpose of Sec.1245 and what is its significance?
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Chapter 14: Special Tax Computation Methods, tax Credits, and Payment of Tax
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Sample Questions
Q1) Nonrefundable credits may offset tax liability but may not result in additional payments to the taxpayer.
A)True
B)False
Q2) Ava has net earnings from self-employment of $125,000.She also earned salary of $170,000 from a job held earlier in the year.How much Additional Medicare Tax will be owed on the self-employment income?
A) $0
B) $769
C) $855
D) $3,625
Q3) Max and Alexandra are married and incur $5,500 of qualifying expenses to care for their two children,ages 2 and 5.Max's earned income is $35,000 and Alexandra's earnings from a part-time job are $5,000.What is the amount of the qualifying expenses for purposes of computing the child and dependent care credit?
A) $3,000
B) $5,000
C) $5,500
D) $6,000
Page 16
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Chapter 15: Tax Research
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Sample Questions
Q1) Which regulation deals with the gift tax?
A) Reg. Sec. 1.165-5
B) Reg. Sec. 20.2014-5
C) Reg. Sec. 25.2518-5
D) Reg. Sec. 301.7002-5
Q2) Distinguish between an annotated tax service and a topical tax service.
Q3) Explain the legislative reenactment doctrine.
Q4) When the Tax Court follows the opinion of the circuit court of appeals to which the case is appealable,the court is following the
A) Golsen rule.
B) Acquiescence rule.
C) Forum shopping rule.
D) Conformity rule.
Q5) What is "forum-shopping"?
Q6) Describe the format of a client memo.
Q7) Appeals from the Court of Appeals go to the Supreme Court under a writ of certiorari.The Supreme Court decides whether or not they will hear the case.
A)True
B)False
Page 17
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Chapter 16: Corporations
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Sample Questions
Q1) Daniel transfers land with a $92,000 adjusted basis and a $100,000 FMV to a corporation in a Sec.351 transfer.Immediately after the transfer,Daniel owns 100% of the corporation-stock with a FMV of $15,000.In addition,$85,000 of business-related liabilities are assumed by the corporation with respect to the transfer.No other property is transferred.Daniel's basis in the stock is
A) $0.
B) $7,000.
C) $8,000.
D) $100,000.
Q2) Individuals Bert and Tariq form Shark Corporation.Bert transfers equipment with a $290,000 adjusted basis and a $335,000 FMV for 50% of the stock worth $310,000 and a note of Shark Corporation valued at $25,000.Tariq transfers cash of $335,000 in exchange for 50% of the stock of Shark Corporation worth $310,000 and a $25,000 note.Bert's recognized gain is
A) $0.
B) $20,000.
C) $25,000.
D) $45,000.
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Chapter 17: Partnerships and S Corporations
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Sample Questions
Q1) What are special allocations of partnership items and when are they permitted?
Q2) David and Joycelyn form an equal partnership in the current year.No special allocation is provided for in the partnership agreement.During the year David contributes land having a $90,000 basis and a $100,000 FMV in exchange for the initial partnership interest.In addition,the partnership earns $50,000 of ordinary income while partnership liabilities increase from zero to $30,000 by the end of the tax year.The partnership earns $20,000 of tax-exempt interest during the year.David's basis at the end of the current year is
A) $115,000.
B) $125,000.
C) $130,000.
D) $140,000.
Q3) When an S corporation shareholder sells her stock,she must first recognize ordinary gain to the extent of her share of the unrealized receivables and appreciation on inventory held by the S corporation,with the balance of the gain treated as capital gain.
A)True
B)False
Q4) Discuss the concept of partnership guaranteed payments.
Q5) Why are some partnership items separately stated?
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Chapter 18: Taxes and Investment Planning
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Sample Questions
Q1) State and local government obligations such as municipal bonds are classic examples of which model?
A) Deferred Model
B) Exempt Model
C) Current Model
D) Pension Model
Q2) When evaluating current salary versus deferred compensation,an employer considers the fact that a current salary is deducted in the current year and provides an immediate tax benefit.
A)True
B)False
Q3) A flow-through entity's primary characteristic is that income escapes taxation at the entity level and flows-through to be taxed at the ownership level.
A)True
B)False
Q4) Savings accounts and money market funds are examples of investments taxed under the Current Model.
A)True
B)False
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