Tax Policy and Individual Taxation Final Exam
Course Introduction
This course examines the principles and practice of tax policy as it applies to individual taxpayers. Students will explore the economic, legal, and social considerations that shape tax systems, with an emphasis on income taxation, tax expenditures, credits, deductions, and the effects of tax policy on behavior and equity. Key topics include tax structure, progressivity, compliance and enforcement, as well as policy debates surrounding tax reform and the impacts on different demographic groups. Through case studies and applied analysis, students will gain a comprehensive understanding of how tax policy decisions influence individuals and society at large.
Recommended Textbook
South Western Federal Taxation 2018 Individual Income Taxes 41st Edition by William H. Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
Federal Tax Law
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Q1) Import taxes (customs duties)
Answer: k
Q2) To mitigate the effect of the annual accounting period concept, the tax law permits the carryforward to other years of the excess charitable contributions of a particular year.
A)True
B)False
Answer: True
Q3) A calendar year taxpayer files his 2016 Federal income tax return on March 4, 2017. The return reflects an overpayment of $6,000, and the taxpayer requests a refund of this amount. The refund is paid on May 16, 2017. The refund need not include interest.
A)True
B)False
Answer: True
Q4) When Congress enacts a tax cut that is phased in over a period of years, revenue neutrality is achieved.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Working With the Tax Law
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Q1) The primary purpose of effective tax planning is to reduce or defer the tax in the current tax year.
A)True
B)False
Answer: False
Q2) The granting of a Writ of Certiorari indicates that at least four members of the Supreme Court believe that an issue is of sufficient importance to be heard by the full court.
A)True
B)False Answer: True
Q3) A taxpayer must pay any tax deficiency assessed by the IRS and sue for a refund to bring suit in the U.S. Court of Federal Claims. Only in the Tax Court can jurisdiction be obtained without first paying the assessed tax deficiency.
A)True
B)False Answer: True
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Chapter 3: Tax Formula and Tax Determination; an
Overview of Property Transactions
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Q1) Kim, a resident of Oregon, supports his parents who are residents of Canada but citizens of Korea. Kim can claim his parents as dependents.
A)True
B)False
Answer: True
Q2) In terms of the tax formula applicable to individual taxpayers, which, if any, of the following statements is correct?
A)In arriving at taxable income, a taxpayer must choose between the standard deduction and deductions from AGI.
B)In arriving at AGI, personal and dependency exemptions must be subtracted from gross income.
C)In arriving at taxable income, a taxpayer must choose between the standard deduction and claiming personal and dependency exemptions.
D)The formula does not apply if a taxpayer elects to claim the standard deduction.
E)None of these.
Answer: A
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) April, a calendar year taxpayer, is a 40% partner in Pale Partnership, whose fiscal year ends on September 30th. For the fiscal year ending September 30, 2017, the partnership had $400,000 net income and for fiscal year ending September 30, 2018, the partnership had $300,000 net income. April withdrew $100,000 in December of each year. April's gross income from the partnership for 2017 is $160,000 ($400,000 × 40%).
A)True
B)False
Q2) Theresa, a cash basis taxpayer, purchased a bond on July 1, 2013, for $10,000, plus $400 of accrued interest. The bond paid $800 of interest each December 31. On March 31, 2017, she sold the bond for $9,800, which included $200 of accrued interest.
A)Theresa has $200 interest income and a $400 loss from the bond in 2017.
B)Theresa has $200 interest income and a $200 gain from the bond in 2017.
C)Theresa has a $100 loss from the sale of the bond and no interest income.
D)Theresa's loss on the sale of the bond is $600.
E)None of these.
Q3) How does the taxation of Social Security benefits differ from the taxation of an annuity purchased by the taxpayer?
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Page 6
Chapter 5: Gross Income: Exclusions
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Q1) The employees of Mauve Accounting Services are permitted to use the copy machine for personal purposes, provided the privilege is not abused. Ed is the president of a civic organization and uses the copier to make several copies of the organization's agenda for its meetings. The copies made during the year would have cost $150 at a local office supply.
A)Ed must include $150 in his gross income.
B)Ed may exclude the cost of the copies as a no-additional cost fringe benefit.
C)Ed may exclude the cost of the copies only if the organization is a client of Mauve.
D)Ed may exclude the cost of the copies as a de minimis fringe benefit.
E)None of these.
Q2) The earnings from a qualified state tuition program account are deferred from taxation until they are used for qualified higher education expenses. At that time, the amount taken from the fund must be included in the gross income of the person who contributed to the account.
A)True
B)False
Q3) What Federal income tax benefits are provided for college students?
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Page 7
Chapter 6: Deductions and Losses: in General
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Q1) On January 2, 2017, Fran acquires a business from Chuck. Among the assets purchased are the following intangibles: patent with a 7-year remaining life, a covenant not to compete for 10 years, and goodwill. Of the purchase price, $140,000 was paid for the patent and $60,000 for the covenant. The amount of the excess of the purchase price over the identifiable assets was $100,000. What is the amount of the amortization deduction for 2017?
A)$10,667.
B)$16,000.
C)$20,000.
D)$32,667.
E)None of the above.
Q2) An expense need not be recurring in order to be "ordinary."
A)True
B)False
Q3) Discuss the application of the "one-year rule" on prepayments by a cash basis taxpayer.
Q4) Trade or business expenses are classified as deductions for AGI. Section 212 expenses, barring certain exceptions, are classified as deductions from AGI. What are these exceptions?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) Susan has the following items for 2017:
Loss on rental property caused by termites-$110,000. Insurance covered 80% of the loss. Loss on personal use automobile-$10,000. The insurance policy does not cover the first $3,000 of loss. Susan decided not to file a claim for the loss.
Loss on a painting stolen from Susan's house. Susan purchased the painting three years ago as an investment. She paid $40,000 for the painting and it was worth $35,000 at the time of the theft. The painting was insured for the fair market value. Salary-$40,000. Determine Susan's AGI and total amount of itemized deductions for 2017.
Q2) Mary incurred a $20,000 nonbusiness bad debt last year. She also had an $8,000 long-term capital gain last year. Her taxable income for last year was an NOL of $15,000.
During the current year, she unexpectedly collected $12,000 on the debt. How should Mary account for the collection?
A)$0 income
B)$8,000 income
C)$11,000 income
D)$12,000 income
E)None of the above
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Page 9
Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Sample Questions
Q1) Discuss the criteria used to determine whether a building is residential or nonresidential realty. Also explain the tax consequences resulting from this determination if the property is placed in service in 2017.
Q2) Jim acquires a new seven-year class asset on September 20, 2017, for $80,000. He placed the asset in service on October 5, 2017. He does not elect to expense any of the asset under § 179 or elect straight-line, cost recovery. He takes additional first-year depreciation. He sells the asset on August 25, 2018. This is the only asset he acquires in 2017. Determine Jim's cost recovery in 2017 and 2018.
Q3) On June 1, 2017, Gabriella purchased a computer and peripheral equipment (five-year property) for $25,000. She used the assets 40% for business, 50% for the production of income, and 10% for personal use. These are the only assets Gabriella purchased during the current year. Determine her total cost recovery deduction for the current year.
Q4) Sid bought a new $1,310,000 seven-year class asset on August 2, 2017. On December 2, 2017, he purchased $800,000 of used five-year class assets. If Sid elects § 179 and takes additional first-year depreciation, what is the maximum cost recovery deduction for these purchases for 2017?
Q5) Discuss the reason for the inclusion amount with respect to leased automobiles.
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) Aiden performs services for Lucas. Which, if any, of the following factors indicate that Aiden is an employee, rather than an independent contractor?
A)Aiden provides his own support services (e.g., work assistants).
B)Aiden obtained his training (i.e., job skills) from his father.
C)Aiden is paid based on hours worked.
D)Aiden makes his services available to others.
E)None of these.
Q2) Flamingo Corporation furnishes meals at cost to its employees by means of a cafeteria it maintains. The cost of operating the cafeteria is not subject to the cutback adjustment.
A)True
B)False
Q3) Felicia, a recent college graduate, is employed as an accountant by an oil company. She would like to continue her education and obtain a law degree. Discuss Felicia's tax status if she attends a local law school on a:
a.Part-time basis.
b.Full-time basis.
Q4) Mixed use (both business and pleasure) foreign travel
Q5) Sue uses her own helpers.
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) Linda is planning to buy Vicki's home. They want to keep the transaction simple, so the sales agreement will not apportion the property taxes that Vicki has already paid on the home. Comment on the tax implications for Linda and Vicki.
Q2) Linda, who has AGI of $120,000 in the current year, contributes stock in Mauve Corporation (a publicly traded corporation) to the Salvation Army, a qualified charitable organization. The stock is worth $65,000, and Linda acquired it as an investment four years ago at a cost of $50,000.
a.What is the total amount that Linda can deduct as a charitable contribution, assuming she carries over any disallowed contribution from the current year to future years?
b.Describe the restrictions that apply when calculating the deduction in the carryover years.
Q3) During the year, Eve (a resident of Billings, Montana) spends three consecutive weeks in Louisville, Kentucky. One week is spent representing the Billings First Christian Church at the national convention, and two weeks are spent vacationing with relatives. One third of Eve's travel expenses will qualify as a charitable deduction.
A)True
B)False
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Page 12
Chapter 11: Investor Losses
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Sample Questions
Q1) Material participation.
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) Identify how the passive activity loss rules broadly classify various types of income and losses. Provide examples of each category.
Q4) A qualified real estate professional is allowed to treat income or loss from any real estate venture as active except for income or loss from a rental activity.
A)True
B)False
Q5) A taxpayer is considered to be a material participant if he or she spends more than 500 hours in the activity.
A)True
B)False
Q6) At-risk amount.
Q7) Describe the general rules that limit the deduction of investment interest expense.
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Chapter 12: Alternative Minimum Tax
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Questions
Q1) Durell owns a construction company that builds residential housing. The company is eligible to use the completed contract method for regular income tax purposes. What can Durell do to minimize his AMT?
Q2) Evan is a contractor who constructs both commercial and residential buildings. Even though some of the contracts could qualify for the use of the completed contract method, Evan decides to use the percentage of the completion method for all of his contracts. This increases Evan's AMT adjustment associated with long-term contracts for the current year.
A)True
B)False
Q3) If Abby's alternative minimum taxable income exceeds her regular taxable income, she will incur an alternative minimum tax.
A)True B)False
Q4) Identify an AMT adjustment that applies for the individual taxpayer that does not apply for the corporate taxpayer and identify an AMT adjustment that applies for the corporate taxpayer that does not apply for the individual taxpayer.
Q5) What tax rates apply in calculating the TMT for an individual taxpayer?
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Chapter 13: Tax Credits and Payment Procedures
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Q1) A taxpayer's earned income credit is dependent on the number of his or her qualifying children.
A)True
B)False
Q2) Expenses that are reimbursed by a taxpayer's employer under a dependent care assistance program can also qualify for the credit for child and dependent care expenses.
A)True
B)False
Q3) A LIFO method is applied to general business credit carryovers, carrybacks, and utilization of credits earned during a particular year.
A)True
B)False
Q4) Dabney and Nancy are married, both gainfully employed, and have two children who are 3 and 6 years old. Dabney's salary is $35,000 while Nancy's salary is $40,000. During the year, they spend $7,000 for child care expenses that are required so both of them can work outside of the home. Calculate the credit for child and dependent care expenses.
Q5) 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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Sample Questions
Q1) Nancy gives her niece a crane to use in her business with a fair market value of $61,000 and a basis in Nancy's hands of $80,000. No gift tax was paid. What is the niece's basis for depreciation (cost recovery)?
A)$0
B)$19,000
C)$61,000
D)$80,000
E)None of the above
Q2) Which of the following is correct?
A)The gain basis for property received by gift is the lesser of the donor's adjusted basis or the fair market value on the date of the gift.
B)The loss basis for property received by gift is the same as the donor's basis.
C)The gain basis for inherited property is the same as the decedent's basis.
D)The loss basis for inherited property is the lesser of the decedent's basis or the fair market value on the date of the decedent's death.
E)None of the above.
Q3) Discuss the effect of a liability assumption on the seller's amount realized and the buyer's adjusted basis.
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) Which, if any, of the following exchanges qualifies for nonrecognition treatment as a § 1031 like-kind exchange?
A)Partnership interest for a partnership interest.
B)Inventory for inventory.
C)Securities for personalty.
D)Business realty for investment realty.
E)None of the above.
Q2) Sidney, a calendar year taxpayer, owns a building (adjusted basis $450,000) in Columbus, OH, in which he conducts his retail computer sales business. The building is destroyed by fire on December 12, 2017, and two weeks later he receives insurance proceeds of $600,000. Due to family ties, Sidney decides to move to Columbia, SC. He reinvests all of the insurance proceeds in a building in Columbia where he opens a retail computer sales business on April 2, 2018. By electing § 1033, Sidney has no recognized gain and a basis in the new building of $450,000 ($600,000 cost - $150,000 postponed gain).
A)True
B)False
Q3) What kinds of property do not qualify under the like-kind provisions?
Q4) What effect do the assumption of liabilities have on a § 1031 like-kind exchange?
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) In 2016, Jenny had a $12,000 net short-term capital loss and deducted $3,000 as a capital loss deduction. In 2017, Jenny has a $18,000 0%/15%/20% long-term capital gain and no other capital gain or loss transactions. Which of the statements below is correct for 2017?
A)Jenny has a $18,000 net capital gain.
B)Jenny has a $9,000 net capital gain.
C)Jenny has a $9,000 net capital loss.
D)Jenny has a $3,000 capital loss deduction.
E)Jenny has a $9,000 capital loss deduction.
Q2) Which of the following is correct concerning short sales of stock?
A)At the time the short sale is made, the taxpayer does not deliver to the purchaser the shares sold short.
B)At the time the short sale is made, the taxpayer delivers to the purchaser the shares sold short.
C)At the time the short sale is made, the taxpayer may already own the shares sold short.
D)At the time the short sale is made, the taxpayer always already owns the shares sold short.
E)None of the above.
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Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Q1) The § 1245 depreciation recapture potential does not reduce the amount of the charitable contribution deduction under § 170.
A)True
B)False
Q2) Involuntary conversion gains may be deferred if the proceeds of the involuntary conversion are reinvested.
A)True
B)False
Q3) Part III of Form 4797 is used to report gains from the sale of depreciable business equipment sold at a gain and held more than one year.
A)True
B)False
Q4) Depreciable personal property was sold at a gain in 2016. On what 2016 form would this transaction be reported, where initially in that form, and what will the form most likely do with the gain?
Q5) Depreciation recapture under § 1245 and § 1250 is reported on Form 4797.
A)True
B)False
19
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Chapter 18: Accounting Periods and Methods
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Q1) Using your knowledge of GAAP and financial reporting, list and explain one good reason why GAAP should not be used for tax purposes and one good reason why it should be used.
Q2) Charlotte sold her unincorporated business for $600,000 in 2017. The sales contract allocated $120,000 to equipment, $300,000 to land, and $180,000 to goodwill. Charlotte had a $0 basis in the goodwill, the land cost $150,000, and the equipment originally cost $250,000 but it was fully depreciated. What is the amount of the gain eligible for installment sales treatment?
A)$0
B)$330,000
C)$450,000
D)$600,000
E)None of the above
Q3) Snow Corporation began business on May 1, 2017, and elected to use the calendar year for tax purposes. Brown Corporation, a calendar year corporation, sold all of its assets and liquidated as of April 30, 2017. Neither Snow Corporation nor Brown Corporation must annualize their income for their 2017 returns.
A)True
B)False
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Page 20
Chapter 19: Deferred Compensation
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Q1) Any pre-tax amount elected by an employee as a plan contribution to a § 401(k) plan that does not exceed the statutory limit is not includible in gross income in the year of deferral and is 100% vested.
A)True
B)False
Q2) Which of the following characteristics describes a defined benefit plan?
A) Subject to PBGC plan termination insurance rules.
B) An account for each participant is not established.
C) Defines the amount the employer is required to contribute.
D) Only a. and b.
E) a., b., and c.
Q3) Merrill is a participant in a SIMPLE § 401(k) plan, and he elects to contribute 4% of his $40,000 compensation to the account, while his employer contributes 3%. What amount will vest immediately, if any?
A)$0
B)$1,200
C)$1,600
D)$2,800
E)None of above
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Page 21
Chapter 20: Corporations and Partnerships
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Q1) In determining which organizational expenditures can be amortized, it is the year incurred (and not paid) that controls if the corporation uses the cash method of accounting.
A)True
B)False
Q2) Which, if any, of the following rules relate only to the income taxation of C corporations?
A)A domestic production activities deduction is allowed.
B)Like-kind exchanges are nontaxable.
C)No deduction is available for inventory donated to charity.
D)Net long-term capital gains are subject to a special alternative tax.
E)None of the above.
Q3) In determining the NOL of a C corporation, fewer adjustments are necessary than in the case of individual taxpayers. Why is this the case?
Q4) If the basis of a partnership interest is exhausted, a partner can use loans made to the partnership to absorb excess losses.
A)True
B)False
Q5) Cannot be a shareholder in another corporation.
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