Principles of Taxation Test Bank
Course Introduction
Principles of Taxation introduces students to the fundamental concepts, laws, and frameworks that govern taxation in modern economies. The course covers the objectives and roles of taxation in public finance, essential tax terminology, types of taxes, tax bases, incidence, and the impact of taxation on individuals and businesses. Students analyze key principles such as equity, efficiency, simplicity, and neutrality in tax policy. The curriculum also includes an overview of the legislative process for enacting tax laws, tax administration, compliance obligations, and ethical considerations in tax practice. By the end of the course, students will have a solid foundation to understand how tax systems operate and their effects on economic decision-making.
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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Page 2
Chapter 1: Conceptual Foundations of Tax Law
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150 Verified Questions
150 Flashcards
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Sample Questions
Q1) Heidi and Anastasia are residents of the mythical country of Wetland.Heidi pays $1,500 income tax on taxable income of $6,000.Anastasia pays income tax of $21,000 on taxable income of $72,000.The income tax structure is
I.Progressive.
II.Proportional.
III.Regressive.
IV.Value-added.
V.Marginal.
A)Only statement I is correct.
B)Only statement II is correct.
C)Only statement III is correct.
D)Only statement V is correct.
E)Statements II and IV are correct.
Answer: A
Q2) All tax practitioners are governed by the AICPA's Code of Professional Conduct. A)True
B)False
Answer: False
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Page 3
Chapter 2: Income Tax Concepts
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153 Flashcards
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Sample Questions
Q1) When items of income are omitted because the cost of the time and effort of the taxpayer to accumulate the information,it is an application of the A)Ability to Pay Concept.
B)Administrative Convenience Concept.
C)Arm's-Length Transaction Concept.
D)Capital Recovery Concept.
E)Pay-as-You-Go Concept.
Answer: B
Q2) The allowance of deductions in calculating taxable income and the use of a progressive tax rate structure are a direct application of the A)Ability to Pay Concept.
B)Administrative Convenience Concept.
C)Arm's-Length Transaction Concept.
D)Capital Recovery Concept.
E)Pay-as-You-Go Concept.
Answer: A
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Chapter 3: Income Sources
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154 Flashcards
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Sample
Questions
Q1) On January 1 of the current year,Beverly borrows $100,000 from her employer,Happy Hills Nursing Home.Beverly uses this loan to pay off credit cards and consumer loans.Happy Hills considers Beverly to be a loyal employee,and allows her up to five years to repay the loan.Beverly is not a shareholder or officer in the Happy Hills.Happy Hills does not charge any interest on the loan.Both Happy Hills and Beverly are on a December 31 fiscal year end.What is the income tax issue for Happy Hills? You do not need to do any calculations.
Answer: At least one of the following should be discussed: 11ea8564_c7e5_5232_9aec_2f475da164ca_TB1197_00
Q2) Which of the following items is a capital asset in the hands of the taxpayer?
A)Taxpayer owns a 10-year old Harley-Davidson motorcycle.
B)Taxpayer owns a used car lot.He owns a 1962 Cadillac that is for sale on the lot.
C)Taxpayer owns a notebook computer that he carries to his clients for work purposes.
D)Taxpayer,a farmer,has a prize winning steer in his herd.
E)None of the above items are capital assets.
Answer: A
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Chapter 4: Income Exclusions
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161 Flashcards
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Sample Questions
Q1) Christine,age 23,is an employee of Higgins Hardware Distributors whose annual salary is $35,000.Higgins provides employees with free group-term life insurance at twice their annual gross salary,free health and accident insurance,a qualified pension plan,and a flexible benefits plan.Christine's health and accident insurance cost Higgins $1,920.The cost of her group-term life insurance coverage is $520.Higgins pension plan allows employees to contribute up to 6% of their annual salary,which Higgins matches.Christine elects to have the maximum pension plan contribution made into the plan and has $400 of her salary paid into the flexible benefits plan.She submits medical insurance claims totaling $900 to the health insurance policy and is reimbursed $550.She receives the remaining $350 of medical insurance claims from the flexible benefits plan.How much gross income does Christine have from her employment with Higgins?
Q2) Health Savings Accounts are available only to self-employed individuals or small businesses.
A)True
B)False
Q3) Marline receives $14 million in punitive damages for a personal physical injury.
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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167 Verified Questions
167 Flashcards
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Sample Questions
Q1) Using the general tests for deductibility,explain why the following expenses are not fully deductible.
a.Irene spends $1,600 on a trip to Florida to investigate opening up a consulting firm.Irene currently works for a consulting firm.
b.Augie and his wife divorce during the current year.Augie pays $3,000 in legal fees related to the divorce.
c.Peter owns a hardware store.During the current year,he pays $328,000 to acquire a new warehouse.
d.Paul contributes $25 to a fund to be used for advertising to persuade voters to vote against a candidate running for Congress.
Q2) Sarah extensively buys and sells securities .The IRS has determined upon examination that she is in a trade or business concerning the securities' transactions and therefore,Sarah is
A)a day trader.
B)an active trader.
C)an active investor.
D)a securities' dealer.
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Chapter 6: Business Expenses
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148 Verified Questions
148 Flashcards
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Sample Questions
Q1) During 2016,Virginia,an architect,made a bona fide $7,500 loan to her friend Joe when he was in a time of need.Joe died in 2017.Virginia has been informed by Joe's estate that he was insolvent.Virginia should record the nonpayment of the loan as
A)An ordinary loss.
B)An itemized deduction.
C)A short-term capital loss.
D)A long-term capital loss.
E)Nothing.It cannot be deducted.
Q2) Legal expenses are generally deductible if they have a business purpose;they are generally not deductible if they originate from a personal transaction.
A)True
B)False
Q3) The actual cost method is a more-flexible way to compute the auto expense deduction and often results in a larger tax savings.
A)True
B)False
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Chapter 7: Losses -- Deductions and Limitations
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Sample Questions
Q1) 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
Q2) Travis is a 30% owner of 3 rental houses.He spends 625 hours a year managing the properties.In addition,he owns a 20% interest in a real estate business to which he devotes 1,800 hours a year.The rental units generate a total loss of $22,000,and Travis' adjusted gross income in the current year,before considering the rental properties,is $120,000.How much of the loss can Travis deduct?
A)$- 0 -
B)$4,500
C)$6,600
D)$15,000
E)$22,000
Q3) An operating loss occurs when an entity's deductions exceeds the income generated for the period.
A)True
B)False
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Page 9
Chapter 8: Taxation of Individuals
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163 Flashcards
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Sample Questions
Q1) Carlyle purchases a new personal residence for $230,000.He makes a down payment of $30,000 and finances the balance at a very favorable interest rate.To obtain the favorable rate,points equal to 3% of the loan balance are paid at the closing.What amount of the points can Carlyle deduct in the current year?
A)$- 0 -
B)$3,000
C)$4,000
D)$6,000
E)$6,600
Q2) During the year,Arlene donates stock she had purchased in 2005 for $30,000 to a qualified public charitable organization.The fair market value of the stock at the time of the donation is $40,000.Her adjusted gross income for the year is $80,000.If the stock donation is her only charitable contribution,what is Arlene's charitable contribution deduction? What should she consider in determining the amount of the deduction?
Q3) Discuss why the distinction between deductions for adjusted gross income and deductions from adjusted gross income is important for individual taxpayers.
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) Tony died on April 5,2017.As part of his will,he leaves land that he paid $6,000 for in 2003 to his son Philip.On April 5,2017,the land is worth $11,000.However,due to local real estate conditions,the land continues to decline in value.On July 28 it is worth only $10,000;it declines further to $9,000 on October 5 and plunges to $7,000 on December 18.
I.In the absence of any special elections,Philip's basis in the land is $6,000.
II.If the executor distributes the land to Philip on July 28,Philip's basis in the land will be $10,000.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Pedro purchased all of the stock of Regis Corporation.Since he purchased all of the stock the basis in all of the corporation's assets must be restated to fair market value.
A)True
B)False
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Chapter 10: Cost Recovery on Property: Depreciation, depletion,
and Amortization
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110 Verified Questions
110 Flashcards
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Sample Questions
Q1) Which of the following intangible assets is subject to the 15-year amortization period?
A)The ownership rights to the TV program "Wheel of Fortune".
B)A professional football franchise purchased and relocated to Los Angeles.
C)Covenant not to compete for five years as part of the purchase of a business.
D)A purchased interest in a high tech partnership.
E)An interest under an existing lease of a oil rig.
Q2) Felix purchases the franchise rights to a new sports team and will be able to amortize the cost over the 15-year amortization period for intangibles.
A)True
B)False
Q3) In June 2016,Chase purchases a new car for $37,000.He uses the car 75% for business purposes.What is Chase's maximum depreciation deduction for the car in 2016?
A)$5,550
B)$2,960
C)$4,200
D)$8,370
E)$11,160
Q4) Discuss why listed property gets special attention.
Page 12
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Chapter 11: Property Dispositions
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Sample Questions
Q1) Unrecaptured Section 1250 gain is taxed at a maximum rate of 25%.
A)True
B)False
Q2) Benjamin has a $15,000 Section 1231 gain from the sale of business-use real estate and a $3,500 long-term capital gain from the sale of Rhyne Corporation stock.Also,he suffers an $18,000 (net of insurance reimbursements and the $100 floor)personal-use property casualty loss.No net Section 1231 losses have been deducted as ordinary losses in prior years.Benjamin's current-year adjusted gross income will increase (decrease)by what amount?
A)$500
B)$3,500
C)$15,000
D)$15,800
E)$18,500
Q3) Discuss the general differences between Section 1245 and Section 1250 property.
Q4) A buyer's assumption of the seller's debt increases the gross sales price and any debt of the buyer assumed by the seller in the transaction also increases the gross sales price.
A)True
B)False
Page 13
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Chapter 12: Nonrecognition Transactions
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120 Flashcards
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Sample Questions
Q1) Computer for delivery truck.
A)qualifies as a like-kind exchange
B)does not qualify as a like-kind exchange
Q2) Like-kind property
A)Losses are never deferred.
B)Can be within the same NAICS Code.
C)Not considered like-kind property.
D)A taxpayer can have only one at a time.
E)The maximum amount that can be recognized on a like-kind exchange.
F)This type of exchange must be completed within 180 days of first property transfer.g.The concept upon which the ability to defer gains on certain nontaxable transactions relies.
Q3) Land held as an investment for land used in a business.
A)qualifies as a like-kind exchange
B)does not qualify as a like-kind exchange
Q4) Taxpayers are allowed to structure transactions through third parties that qualify as exchanges if they meet certain time requirements for identifying properties and closing the transaction.
A)True
B)False
Page 14
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Chapter 13: Choice of Business Entity -- General Tax and
Nontax Factorsformation
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101 Verified Questions
101 Flashcards
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Sample
Questions
Q1) S corporation status is attained when a qualifying corporation elects this status. A)True
B)False
Q2) Which of the following businesses must use the accrual method of accounting?
I.Champion Mortgage Corporation,which has annual gross receipts of $10,000,000.
II.The Happy Bookworm,a local bookstore with annual gross receipts of $950,000.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) Ricardo is the marketing manager and owns a 40% interest in the Fielder Partnership.Fielder's taxable income before considering payments to partners is $80,000.Ricardo withdraws $40,000 for his personal living expenses.How much income must Ricardo report from Fielder?
A)$32,000
B)$40,000
C)$56,000
D)$72,000
Page 15
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Chapter 14: Choice of Business Entity -- Operations and Distributions
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Sample Questions
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) The amount of the dividend on a nonliquidating corporate distribution of property is the fair value of the property.
A)True
B)False
Q3) Fender Corporation makes a cash distribution of $40,000 to Gibson in complete liquidation of the corporation.Gibson's basis in Fender stock is $18,000.What must Gibson report as income from the cash distribution?
A)$- 0 -
B)$18,000
C)$22,000
D)$40,000
Page 16
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Chapter 15: Choice of Business Entity -- Other
Considerations
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Sample Questions
Q1) When calculating AMTI,individual taxpayers must add back the following:
I.Miscellaneous itemized deductions subject to the 2% limitation.
II.Personal exemption amounts.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Sonya is an employee of Gardner Technology and will retire at the end of the current year after 8 years of service.Under Gardner's pension plan she can retire at 60% of the average of her three highest consecutive years' salary.Her average for the highest consecutive years' salary was $30,000.What is the maximum amount Sonya can receive from Gardner's pension plan?
A)$6,000
B)$14,400
C)$18,000
D)$24,000
E)$30,000
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Chapter 16: Tax Research
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Sample Questions
Q1) Greene is an individual taxpayer residing in Colorado (the Tenth Circuit).She has a disagreement with the IRS on a transaction.Her former accountant told her that she has "less than a 50/50 chance of winning." However,she was recently told of one case with similar facts that was decided in a way that would favor Greene.The U.S.Circuit Court of Appeals for the Fifth Circuit decided that case.If Greene takes her case to the U.S.Tax Court,should she feel confident of prevailing? Explain.
Q2) Which of the following statements pertaining to tax law is true?
I.A tax textbook is considered a primary source.
II.Secondary sources help locate and interpret primary sources.
III.Primary sources emanate from the three branches of the federal government.
IV.An article in a law journal written by a former commissioner of the Internal Revenue Service is considered a secondary source of tax law.
A)Only statement I is correct.
B)Statements I and II are correct.
C)Statements I,II,and III are correct.
D)Statements II,III,and IV are correct.
E)Statements I,II,III,and IV are correct.
Q3) Describe the steps of the tax research process.
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Page 18