Taxation I Exam Questions
Course Introduction
Taxation I provides a foundational understanding of the principles, laws, and practices related to taxation. The course covers the structure and functions of tax systems, with a primary focus on individual income taxation, gross income inclusions and exclusions, allowable deductions, and computation of taxable income. Students learn to interpret tax statutes, prepare basic tax returns, and apply tax planning strategies in compliance with current tax regulations. The course also introduces ethical considerations and the roles of various authorities in the tax environment, laying the groundwork for more advanced studies in taxation.
Recommended Textbook
South Western Federal Taxation 2015 Individual Income Taxes 38th Edition by William H. Hoffman
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Page 2
Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) Virtually all state income tax returns contain checkoff boxes for donations to various causes.On what grounds has this procedure been criticized?
Answer: In many cases the procedure is overused (i.e. ,a multiplicity of boxes).This overuse adds complexity to the return.Also,in most cases the donation is being drawn from any income tax refund that might be due.Thus,taxpayers may not fully appreciate that they are paying for such checkoffs.
Q2) During any month in which both the failure to file penalty and the failure to pay penalty apply,the failure to file penalty is increased by the amount of the failure to pay penalty.
A)True
B)False
Answer: False
Q3) A bribe to the local sheriff,although business related,is not deductible.
A)Economic considerations
B)Social considerations
C)Equity considerations
Answer: B
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Page 3
Chapter 2: Working With the Tax Law
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Q1) Federal tax legislation generally originates in what body?
A)Internal Revenue Service
B)Senate Finance Committee
C)House Ways and Means Committee
D)Senate Floor
E)None of these
Answer: C
Q2) The Internal Revenue Code was first codified in what year?
A)1913
B)1923
C)1939
D)1954
E)1986
Answer: C
Q3) Technical Advice Memoranda may not be cited as precedents by taxpayers.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Tax Formula and Tax Determination;an
Overview of Property Transactions
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Sample Questions
Q1) Ellen,age 12,lives in the same household with her father,grandfather,and uncle.The cost of maintaining the household is provided by her grandfather (40%)and her uncle (60%).Disregarding tie-breaker rules,Ellen is a qualifying child as to:
A)Only her father.
B)Only her grandfather and uncle.
C)Only her uncle.
D)All parties involved (i.e. ,father,grandfather,and uncle).
E)None of these.
Answer: D
Q2) Many taxpayers who previously itemized will start claiming the standard deduction when they purchase a home.
A)True
B)False
Answer: False
Q3) When married persons file a joint return,joint and several liability results.What does this mean?
Answer: Joint and several liability means that either spouse is fully liable for any income tax due for the year.Thus,if more tax is due,the IRS can pursue either spouse for the deficiency.
Page 5
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Paula transfers stock to her former spouse,Fred.The transfer is pursuant to a divorce agreement.Paula's cost of the stock was $75,000 and its fair market value on the date of the transfer is $95,000.Fred later sells the stock for $100,000.Fred's recognized gain from the sale of the stock is $5,000.
A)True
B)False
Q2) Sarah,a widow,is retired and receives $20,000 interest income and dividends and $10,000 in Social Security benefits.Sarah is considering selling a stock at an $8,000 gain.What will be the increase in Sarah's gross income as a result of the sale of the stock?
Q3) If the alimony recapture rules apply,the recipient of the alimony decreases his or her AGI by a portion of the amount included in gross income as alimony in a prior year or years.
A)True
B)False
Q4) The financial accounting principle of conservatism is not well-suited to the task of measuring taxable income.
A)True B)False
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Chapter 5: Gross Income: Exclusions
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Q1) What Federal income tax benefits are provided for college students?
Q2) In 2014,Theresa was in an automobile accident and suffered physical injuries.The accident was caused by Ramon's negligence.In 2015,Theresa collected from his insurance company.She received $15,000 for loss of income,$10,000 for pain and suffering,$50,000 for punitive damages,and $6,000 for medical expenses which she had deducted on her 2014 tax return (the amount in excess of 10% of adjusted gross income).As a result of the above,Theresa's 2015 gross income is increased by $56,000.
A)True
B)False
Q3) For a person who is in the 35% marginal tax bracket,$1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax.
A)True
B)False
Q4) Workers' compensation benefits are included in gross income if the employer also pays the employee while the employee is recovering from his or her injury.
A)True
B)False
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Chapter 6: Deductions and Losses: in General
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Q1) All domestic bribes (i.e. ,to a U.S.official)are disallowed as deductions.
A)True
B)False
Q2) Paula is the sole shareholder of Violet,Inc.For 2014,she receives from Violet a salary of $300,000 and dividends of $100,000.Violet's taxable income for 2014 is $500,000.On audit,the IRS treats $100,000 of Paula's salary as unreasonable.Which of the following statements is correct?
A)Paula's gross income will increase by $100,000 as a result of the IRS adjustment.
B)Violet's taxable income will not be affected by the IRS adjustment.
C)Paula's gross income will decrease by $100,000 as a result of the IRS adjustment.
D)Violet's taxable income will decrease by $100,000 as a result of the IRS adjustment.
E)None of these is correct.
Q3) The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes,but is not allowed for a cash method taxpayer.
A)True B)False
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) Last year,Amos had AGI of $50,000.Amos also had a diamond ring stolen which cost $20,000 and was worth $17,000 at the time of the theft.He itemized deductions on last year's tax return.In the current year,Amos recovered $17,000 from the insurance company.Therefore,he must include $11,900 in gross income on the tax return for the current year.
A)True
B)False
Q2) The limit for the domestic production activities deduction (DPAD)uses all W-2 wages paid to employees by the taxpayer during the tax year.
A)True
B)False
Q3) A taxpayer who sustains a casualty loss in an area designated by the President of the United States as a disaster area may take the loss in the year in which the loss occurred or elect to take the loss in the previous year.Identify factors that should be considered in deciding in which year to take the loss.
Q4) Discuss the computation of NOL remaining to be carried forward after the NOL has been applied in a carryback year.
Q5) How is qualified production activities income (QPAI)calculated?
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Q1) Rod paid $1,950,000 for a new warehouse on April 14,2014.He sold the warehouse on September 29,2019.Determine the cost recovery deduction for 2014 and 2019.
Q2) Property which is classified as personalty may be depreciated.
A)True
B)False
Q3) Under the MACRS straight-line election for personalty,only the half-year convention is applicable.
A)True
B)False
Q4) The statutory dollar cost recovery limits under § 280F does apply to all automobiles. A)True
B)False
Q5) Land improvements are generally not eligible for cost recovery.
A)True
B)False
Q6) Polly purchased a new hotel on July 20,2014,for $6,000,000.On January 20,2021,the building was sold.Determine the cost recovery deduction for the year of the sale.
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) A deduction for parking and other traffic violations incurred during business use of the automobile is allowed under the actual cost method but not the automatic mileage method.
A)True
B)False
Q2) Mallard Corporation pays for a trip to Aruba for its two top salespersons.This expense is subject to the cutback adjustment.
A)True
B)False
Q3) When is a taxpayer's work assignment in a new locale temporary? Permanent? What difference does it make?
Q4) Jacob is a landscape architect who works out of his home.He wonders whether or not he will have nondeductible commuting expenses when he drives to the locations of his clients.Please comment.
Q5) A taxpayer who claims the standard deduction will not avoid the 2% floor on unreimbursed employee expenses.
A)True
B)False
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) Mason,age 70,a physically handicapped individual,pays $10,000 in 2014 for the installation of wheelchair ramps,support bars,and railings in his personal residence.These improvements increase the value of his personal residence by $2,000.Only $8,000 of the expenditure qualifies as a medical deduction (subject to the AGI floor).
A)True
B)False
Q2) Grace's sole source of income is from a restaurant that she owns and operates as a proprietorship.Any state income tax Grace pays on the business net income must be deducted as a business expense rather than as an itemized deduction.
A)True B)False
Q3) Any capital asset donated to a public charity that would result in long-term capital gain if sold,is subject to the 30%- of-AGI ceiling limitation on charitable contributions for individuals.
A)True
B)False
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Page 12
Chapter 11: Investor Losses
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Sample Questions
Q1) Describe the types of activities and taxpayers that are subject to the at-risk rules.
Q2) Dena owns interests in five businesses and has full-time employees in each business.She participates for 100 hours in Activity A,120 hours in Activity B,130 hours in Activity C,140 hours in Activity D,and 125 hours in Activity E.
A)All five of Dena's activities are significant participation activities.
B)Dena is a material participant with respect to all five activities.
C)Dena is not a material participant in any of the activities.
D)Dena is a material participant with respect to Activities B,C,D,and E.
E)None of these.
Q3) Discuss the treatment given to suspended passive activity losses and credits.What happens to an activity's unused losses and credits when the activity is sold?
Q4) Wayne owns a small apartment building that produces a $45,000 loss during the year.His AGI before considering the rental loss is $85,000.Because Wayne is an active participant with respect to the rental activity,he may deduct the $45,000 loss.
A)True
B)False
Q5) What special passive loss treatment is available to real estate activities?
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Page 13
Chapter 12: Alternative Minimum Tax
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Q1) AMT adjustments can be positive or negative,whereas AMT preferences are always positive.
A)True
B)False
Q2) Bianca and David have the following for 2014: Regular income tax before credits $32,000
Tentative AMT before credits 45,000
a.Calculate Bianca and David's AMT if they qualify for the adoption expense credit of $11,000.
b.Calculate Bianca and David's AMT if they qualify for the adoption expense credit of $13,190.
Q3) Sand Corporation,a calendar year taxpayer,has alternative minimum taxable income [before adjustment for adjusted current earnings (ACE)] of $900,000 for 2014.If Sand's (ACE)is $975,000,its tentative minimum tax for 2014 is:
A)$0.
B)$56,250.
C)$180,000.
D)$191,250.
E)None of these.
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Page 14
Chapter 13: Tax Credits and Payment Procedures
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Q1) In March 2014,Gray Corporation hired two individuals,both of whom were certified as long-term recipients of family assistance benefits.Each employee was paid $11,000 during 2014.Only one of the individuals continued to work for Gray Corporation in 2015,earning $9,000 during the year.No additional workers were hired in 2015.Gray Corporation's work opportunity tax credit amounts for 2014 and 2015 are:
A)$4,000 in 2014,$4,000 in 2015.
B)$8,000 in 2014,$4,500 in 2015.
C)$8,000 in 2014,$5,000 in 2015.
D)$8,000 in 2014,$9,000 in 2015.
E)None of these.
Q2) Both education tax credits are available for qualified tuition expenses,and in certain instances,also may be available for room and board.
A)True
B)False
Q3) An employer's tax deduction for wages is affected by the work opportunity tax credit.
A)True
B)False
Q4) Discuss the treatment of unused general business credits.
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Page 15
Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Q1) Identify two tax planning techniques that can be used to avoid the wash sale disallowance of loss.
Q2) Since wash sales do not apply to gains,it may be desirable to engage in this type of transaction before the end of the tax year.
A)True
B)False
Q3) What is the difference between the depreciation (or cost recovery)allowed and the depreciation (or cost recovery)allowable and what effect does each have on the adjusted basis of property?
Q4) Jacob owns land with an adjusted basis of $140,000 and a fair market value of $115,000.Determine the amount of realized and recognized gain or loss to the seller and the adjusted basis for the buyer for each of the following.
a.Jacob sells the land for $115,000 to a corporation in which he owns 60% of the stock.
b.Jacob sells the land for $115,000 to a partnership in which he has a capital and profits interest of 60%.
Q5) When a property transaction occurs,what four questions should be considered with respect to the sale or other disposition?
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) A building located in Virginia (used in business)exchanged for a building located in France (used in business)cannot qualify for like-kind exchange treatment.
A)True
B)False
Q2) Under what circumstances may a partial § 121 exclusion be available even though the taxpayer has used the § 121 exclusion within the two-year period preceding the sale of the current residence?
Q3) Pat owns a 1965 Mustang car which he uses for personal use.He purchased it four years ago for $22,000,and it currently is worth $27,000.He exchanges it for a 1979 Triumph Spitfire convertible worth $27,000.Pat's recognized gain is $0 and his adjusted basis for the convertible is $22,000.
A)True
B)False
Q4) The basis of boot received in a like-kind exchange is its fair market value,unless the realized gain is a smaller amount.
A)True
B)False
Q5) Discuss the treatment of realized gains from involuntary conversions.
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) Which of the following comparisons is correct?
A)Corporations may carryback capital losses;individuals may not.
B)Both corporation and individual long-term capital losses carryover as short-term capital losses.
C)Corporations may carryforward capital losses indefinitely;individuals may only carryforward capital losses for five years.
D)Both corporations and individuals may use an alternative tax rate on net capital gains. E)None of these.
Q2) The tax law requires that capital gains and losses be separated from other types of gains and losses because there are limitations on the deduction of net capital losses. A)True B)False
Q3) On January 10,2014,Wally sold an option for $2,000 on vacant land he held as an investment.He had purchased the land in 2010 for $76,000.The option allowed the option holder to purchase the property for $122,000 plus the cost of the option.On March 1,2014,the option holder exercised the option.What is the amount and nature of Wally's gain or loss from disposition of the land?
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Page 18
Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Q1) If § 1231 asset casualty gains and losses net to a gain,the gain is treated as a § 1231 gain.
A)True B)False
Q2) Residential real estate was purchased in 2011 for $345,000,held as rental property,and depreciated straight-line.Assume the land cost was $45,000 and the building cost was $300,000.Depreciation totaled $34,089.The building and land were sold on June 10,2014,for $683,000 total.What is the tax status of the property,the nature of the gain from the disposition,and is any of it § 1250 depreciation recapture gain or unrecaptured § 1250 gain?
Q3) A business machine purchased April 10,2012,for $98,000 was fully depreciated in 2012 using § 179 immediate expensing.On August 15,2014,the machine was sold for $67,000.What is the amount and nature of the gain or loss from disposition of the machine?
Q4) The § 1245 depreciation recapture potential does not reduce the amount of the charitable contribution deduction under § 170.
A)True B)False
Page 19
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Chapter 18: Accounting Periods and Methods
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Q1) In 2014,Beth sold equipment used in her business.Her basis in the property was $300,000 ($500,000 cost less $200,000 of depreciation).Beth sold the property for $400,000,with $100,000 due on the date of the sale and $300,000 (plus interest at the Federal rate)due in 2015.Beth's recognized gain from the installment sale in 2014 is:
A)$0.
B)$50,000.
C)$100,000.
D)$200,000.
E)None of these.
Q2) Red Corporation and Green Corporation are equal partners in the R & G Partnership.Red Corporation's tax year ends September 30th,and Green Corporation is a calendar year taxpayer.The greatest aggregate deferral of income would occur if the partnership used a calendar year for tax purposes.
A)True
B)False
Q3) The lower of cost or market can be used in conjunction with both the FIFO and LIFO method.
A)True
B)False
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Page 20
Chapter 19: Deferred Compensation
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Q1) If a taxpayer receives an early distribution from a qualified retirement plan,a 10% additional tax is levied on the full amount of any distribution includible in gross income.
A)True
B)False
Q2) In a stock bonus plan,contributions are dependent on the employer's profits.
A)True
B)False
Q3) Danielle,who is retired,reaches age 70 1/2 in 2013,and she will also be age 71 in 2013.She has a $150,000 balance in her traditional IRA.If her life expectancy is 15.3 years,what distribution,if any,must be made by April 1,2014?
A)$0
B)$9,804
C)$19,608
D)$150,000
E)None of these
Q4) Group life insurance is considered a deferred compensation plan.
A)True
B)False
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21
Chapter 20: Corporations and Partnerships
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Q1) Skinner Corporation,a calendar year C corporation,had the following transactions during the current year: \(\begin{array}{llcc}
\text { Income from operations } &\$800,000 \\
\text { Expenses from operations } &900,000\\
\text {Dividends from Siskin Corporation (20\% ownership) } &200,000\\ \\
\text {Skinner's taxable income (or NOL) for the current year is: } &\\ \end{array}\)
A)\(\text { \$100,000 taxable income. }\)
B)\(\text { 44,000 NOL. }\)
C)\(\text { \$60,000 NOL }\)
D)\(\text { \$100,000 NOL. }\)
E)\(\text { None of these }\)
Q2) The amortization of organizational expenditures and the dividends received deduction are allowed in determining the taxable income of an S corporation.
A)True
B)False
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Page 22