Principles of Taxation Test Questions
Course Introduction
Principles of Taxation introduces students to the foundational concepts and frameworks underlying tax systems, emphasizing the economic, legal, and administrative principles that guide tax policy and practice. The course covers the objectives of taxation, the characteristics of effective tax systems, principles of equity and efficiency, and the various types of taxes such as income, corporate, sales, and property taxes. It further explores tax incidence, the impact of taxation on individuals, businesses, and the economy, and the ethical considerations in tax planning and compliance. Through case studies and practical examples, students gain a comprehensive understanding of how taxation influences fiscal policy, resource allocation, and social welfare.
Recommended Textbook
Concepts in Federal Taxation 2014 21st Edition by Kevin E. Murphy
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16 Chapters
2109 Verified Questions
2109 Flashcards
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Chapter 1: Federal Income Taxation - an Overview
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Sample Questions
Q1) Madeline operates a janitorial service.The business is organized as a corporation.She has a crew of 100 employees that clean offices and commercial buildings on a set schedule.Madeline also runs a maid service.Since persons paying for the maid services are individuals,the amounts paid to Madeline are not reported to the IRS.Madeline has developed a tax plan.She will deposit the maid service fees to her personal bank account.As a result,she can draw a smaller salary from the janitorial service.She will pay the maids for their services through the corporation.Since she is not deducting her salary from the corporation to the extent she keeps the maid fees,she does not report income from the maid fees.Has Madeline evaded the income tax? Explain.
Answer: Yes.Madeline has willfully changed the facts concerning her transactions in order to receive a tax benefit.By not reporting the maid fees in her business,she has willfully evaded taxation,especially since she is deducting the maid salaries.
Q2) Congress is required to insure that the tax law has the following characteristics: equality,certainty,convenience,and economy.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Income Tax Concepts
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Sample Questions
Q1) Sanchez Company allows its employees to make personal copies without charge on the company copy machines.What concept,construct,or doctrine helps explain why the benefit received is not taxable to Sanchez employees?
A)Administrative Convenience Concept.
B)Assignment of Income Doctrine.
C)Arms-length Transaction Concept.
D)Ability To Pay Concept.
E)Pay As You Go Concept.
Answer: A
Q2) Jane owns 100% of the stock of Lacy Corporation.Jane's son,Lee,is employed by Lacy Corporation as a consultant.Which of the following concepts or doctrines is least helpful in determining the tax consequences of any payments Lacy makes to Lee?
A)Arm's-Length Transaction Concept.
B)Substance Over Form Doctrine.
C)Assignment of Income Doctrine.
D)Business Purpose Concept.
E)Entity Concept.
Answer: E
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4
Chapter 3: Income Sources
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Sample Questions
Q1) Which of the following constitutes a realization?
I.Oak Ridge Coal Company's coal mine reserves were recently appraised at $5,750,000 more than the previous year's appraisal.
II.Lea's employer gives her (and all other salaried employees)a weekend in Chicago in recognition of their efforts to make this a successful year.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Answer: B
Q2) According to the U.S.Supreme Court,income may be defined as the gain derived from capital,from labor,or from both combined provided it is understood to include profit gained through sale or conversion of capital assets.
A)True
B)False
Answer: True
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Chapter 4: Income Exclusions
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Sample Questions
Q1) Kenneth receives a new Ford Explorer worth $28,900 that his parents bought him for his 24<sup>th</sup> birthday.
A)Fully excluded from gross income.
B)Fully included in gross income.
C)Partially excluded from gross income.
Q2) Any income earned subsequent to the death of the decedent from inherited property is excludable from the heir's taxable income.
A)True
B)False
Q3) No-additional-cost services and employee discounts must be made available to employees on a nondiscriminatory basis and must also be in the same line of business in which the employee works to be excluded from the employee's income.
A)True
B)False
Q4) Matt,a U.S.citizen,can exclude all of his $100,000 salary he earned as a bullfighter in Spain where he lived all year,from his U.S.tax return.
A)True
B)False
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Page 6
Chapter 5: Introduction to Business Expenses
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168 Verified Questions
168 Flashcards
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Sample Questions
Q1) Premiums the insured taxpayer pays for life insurance
A)Capitalized and amortized over a number of accounting periods
B)Expensed in the period incurred
C)Not deductible
D)Can be capitalized and amortized or deductible depending on the amount of the expenditure
Q2) Repair-and-maintenance expenditures
A)Capitalized and amortized over a number of accounting periods
B)Expensed in the period incurred
C)Not deductible
D)Can be capitalized and amortized or deductible depending on the amount of the expenditure
Q3) Which of the following expenses is/are deductible?
I.Transportation and lodging expenses of $4,000 to influence state legislation that may affect the taxpayer's business.
II.A $4,000 contribution to the mayor's campaign fund.
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 6: Business Expenses
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Sample Questions
Q1) Aaron is a 34-year-old head of household and a self-employed taxpayer.He contributed the maximum amount to his IRA account during the current year,and his net earnings from his business totaled $29,000.How much can Aaron deduct for AGI this year?
A)$ - 0 -
B)$3,200
C)$3,800
D)$5,000
E)$5,500
Q2) Oliver owns Wifit,an unincorporated sports store.In 2013 Wifit earned $100,000,before Oliver drew out a salary of $60,000.What is Oliver's 2013 deduction for self-employment taxes?
A)$ 2,826
B)$ 7,065
C)$ 7,650
D)$14,130
E)$15,300
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Chapter 7: Losses: Deductions and Limitations
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Sample Questions
Q1) Norris owns a passive activity that has a suspended loss of $12,000.The activity has a fair market value of $42,000 and his adjusted basis in the activity is $27,000.
I.If Norris gifts the property,he is allowed to deduct $3,000 of the suspended loss.
II.If Norris dies,none of the suspended loss is deductible.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Anna owns a passive activity that has a basis of $30,000 and a suspended loss of $7,000.Anna gifts the passive activity to her daughter Patricia when the property has a fair market value of $42,000.
I.Anna will report an ordinary loss of $7,000.
II.Patricia's basis in the passive activity is $30,000.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) Why did Congress enact the at-risk rules?
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Chapter 8: Taxation of Individuals
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Sample Questions
Q1) To be a qualifying relative,an individual must meet certain tests.These tests include, I.the gross income test.
II.the age test.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) 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
Q3) Discuss why the distinction between deductions for adjusted gross income and deductions from adjusted gross income is important for individual taxpayers.
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Chapter 9: Acquisitions of Property
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Sample Questions
Q1) On June 10,2012,Wilhelm receives a gift of gold coins with a fair market value of $10,000.The gold coins had an adjusted basis of $12,000 to the donor.Wilhelm sells the gold coins August 1,2013,for $8,000.What is the amount of the recognized gain or loss on the sale?
A)$ - 0 -
B)$2,000 loss
C)$3,000 loss
D)$4,000 loss
E)$5,000 loss
Q2) Morrris,an attorney,performs 5 hours of legal work for Andy.Morrris 's normal billing rate is $120 per hour.Andy,a software consultant,gives Morrris a new computer for his office in payment of the bill.The computer's adjusted basis was $500 and its fair market value is $550 Morrris ' basis in the computer is
A)$ - 0 -
B)$ 500
C)$ 550
D)$ 600
E)$1,150
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11
Chapter 10: Cost Recovery on Property: Depreciation, depletion,
and Amortization
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Sample Questions
Q1) During 2013,Williams Company purchases and places in service office equipment with a cost of $40,000.The equipment is 7-year MACRS property.What is its 2013 depreciation deduction for purposes of the alternative minimum tax?
A)$ 2,000
B)$ 2,857
C)$ 3,000
D)$ 4,000
E)$ 5,714
Q2) Pedro purchased used delivery equipment costing $80,000 and used computers costing $90,000 (the only assets purchased)that are used in his business.He may allocate his section 179 deduction to either or both assets.
A)True
B)False
Q3) MACRS requires the use of one of three conventions.For personal property,the general and most common convention is
A)mid-life
B)mid-quarter.
C)mid-month.
D)mid-year.
Page 12
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Chapter 11: Property Dispositions
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Sample Questions
Q1) George's wife sells stock she purchased 10 months ago at a gain of $212.
A)Long-term capital
B)Short-term capital
C)Collectible gain
D)Section 1231
E)Section 1245
F)Section 1250
G)Ordinary income/loss
H)Nontaxable/nondeductible
Q2) Elizabeth paid $400,000 for a warehouse.Using 39-year straight-line depreciation,Elizabeth deducts $24,868 for the first two years of usage.At the beginning of the third year,Elizabeth sells the warehouse for $380,000.How much of the gain is recaptured as Section 1250 ordinary income?
A)$ - 0 -
B)$ 4,868
C)$ 24,868
D)$380,000
E)$400,000
Q3) Discuss the general differences between Section 1245 and Section 1250 property.
Q4) What incentive provisions or preferential treatments exist for capital gains?
Page 13
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Chapter 12: Nonrecognition Transactions
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Sample Questions
Q1) Third-party exchange
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.
Q2) Lindsey exchanges investment real estate parcels with Donna.Her adjusted basis in the property is $400,000,and it is encumbered by a mortgage liability of $200,000.Donna assumes the mortgage.Donna's property is appraised at $1,000,000 and is subject to a $100,000 liability.Lindsey assumes the liability.If no cash is exchanged,what is the amount of gain recognized by Lindsey?
A)$ - 0 -
B)$100,000
C)$200,000
D)$500,000
E)$900,000
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Page 14
Chapter 13: Choice of Business Entity - General Tax and
Nontax Factorsformation
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Sample Questions
Q1) Paris is a CPA and a partner in a small firm.To limit her liability from the negligence or misconduct of her partners,they can form the firm as a Limited Liability Partnership.
A)True
B)False
Q2) A limited partner
I.Can lose any or all of their investment in the partnership.
II.Can participate in the management of the partnership.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) Which of the following entities directly bear the burden of income taxes?
I.Limited Liability Company
II.Corporations
III.Partnerships
A)Only statement I is correct.
B)Only statement II is correct.
C)Statements I and II are correct.
D)Statements I, II, and III are correct.
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Chapter 14: Choice of Business Entity - Operations and Distributions
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Sample Questions
Q1) Louise is the marketing manager and a 30% owner of Walker Company.At the beginning of the current year,Louise's basis in Walker Company is $22,000.During the year,Walker borrows $50,000 to finance the construction of a new building.For the year,Walker suffers a $100,000 net operating loss and distributes $60,000 in cash to its owners.Determine Louise's deductible loss if Walker is organized as a.A partnership
b.A corporation
c.An S corporation
Q2) With the exception of personal service and closely-held corporations,regular corporations are not subject to the passive activity rules.
A)True
B)False
Q3) The amount of the dividend on a nonliquidating corporate distribution of property is the fair falue of the property.
A)True
B)False
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Chapter 15: Choice of Business Entity - Other Considerations
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Sample Questions
Q1) Money purchase plan
A)A separate, parallel tax system designed to ensure a taxpayer pays some tax.
B)A compensation tool that is based on potential price increases of the company's stock.
C)An individual trust account maintained for the exclusive benefit of an individual or beneficiary.
D)A type of defined contribution pension plan in which the company and the employee contribute a fixed percentage of the employee's salary to the plan.
E)A pension plan in which the benefits are based on the number of years an employee has worked for a company and on the employee's annual salary.
F)A pension plan whose benefits are determined by the amount of contributions the employee and the company contribute to the plan and the earnings of the plan.
Q2) Tim has a 25% interest in Hill and Associates,a partnership.Tim is eligible for coverage as an employee under the firm's qualified pension plan.
A)True
B)False
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Page 17
Chapter 16: Tax Research
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Sample Questions
Q1) Primary sources of tax law include
I.Treasury Regulations.
II.IRS Revenue Procedures.
III.Internal Revenue Code of 1986.
IV.The Tax Law Review.
A)Only statement III is correct.
B)Statements II and III are correct.
C)Only statement I is correct.
D)Statements I, II, and III are correct.
E)Statements I, II, III, and IV are correct.
Q2) If the U.S.Supreme Court denies a writ of certiorari,it means
I.The court did not feel the case was important enough to review.
II.The decision of the lower court is correct.
III.The decision of the circuit court of appeals is effectively reversed.
IV.At least five of the Supreme Court justices voted to deny reviewing the case.
A)Only statement I is correct.
B)Statements I and II are correct.
C)Statements II and IV are correct.
D)Only statement III is correct.
E)Statements I, III, and IV are correct.
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