Taxation of Individuals Exam Bank
Course Introduction
This course provides a comprehensive introduction to the principles and applications of federal income taxation as it applies to individual taxpayers. Topics covered include the definition of gross income, allowable deductions, tax credits, filing status, exemptions, and the calculation of taxable income. Students will explore key tax concepts, such as capital gains and losses, tax planning strategies, and the ethical considerations involved in tax compliance. The course also introduces the use of tax software and prepares students to analyze real-life tax scenarios, equipping them with the knowledge necessary to interpret current tax laws and regulations affecting individuals.
Recommended Textbook
South Western Federal Taxation 2013 Individual Income Taxes 36th Edition by William H
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) Mona inherits her mother's personal residence,which she converts to a furnished rent house.These changes should not affect the amount of ad valorem property taxes levied on the properties.
A)True
B)False
Answer: False
Q2) Sales made by mail order are not exempt from the application of a general sales (or use)tax.
A)True
B)False
Answer: True
Q3) State income taxes generally can be characterized by:
A) A different date for filing than the Federal income tax.
B) No provision for withholding procedures.
C) Allowance of a deduction for Federal income taxes paid.
D) Applying only to individuals and not applying to corporations.
E) None of the above.
Answer: E
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Chapter 2: Working With the Tax Law
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Q1) Which of the following is not published in the Cumulative Bulletin?
A) Revenue Rulings.
B) Proposed Regulations.
C) Actions on Decisions.
D) Letter Rulings.
E) General Counsel Memoranda.
Answer: D
Q2) What is the role of the Joint Conference Committee in the legislative process?
Answer: When the Senate version of a bill differs from that passed by the House,the Joint Conference Committee,which includes members of both the House Ways and Means Committee and the Senate Finance Committee,is called upon to resolve the differences.The deliberations of the Joint Conference Committee usually produce a compromise between the two versions,which is then voted on by both the House and the Senate.If both bodies accept the bill,it is referred to the President for approval or veto.
Q3) Federal tax legislation generally originates in the Senate Finance Committee.
A)True
B)False
Answer: False
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Chapter 3: Tax Formula and Tax Determination: an
Overview of Property Transactions
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Q1) Jason and Peg are married and file a joint return.Both are over 65 years of age and Jason is blind.Their standard deduction for 2012 is $15,350 ($11,900 + $1,150 + $1,150 + $1,150).
A)True
B)False
Answer: True
Q2) Since an abandoned spouse is treated as single and has one or more dependent children,he or she qualifies for the standard deduction available to head of household. A)True
B)False
Answer: True
Q3) Katrina,age 16,is claimed as a dependent by her parents.During 2012,she earned $5,600 as a checker at a grocery store.Her standard deduction is $5,900 ($5,600 earned income + $300).
A)True
B)False
Answer: True
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Page 5
Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Daniel purchased a bond on July 1,2012,at par of $10,000 plus accrued interest of $300.On December 31,2012,Daniel collected the $600 interest for the year.On January 1,2013,Daniel sold the bond for $10,200.
A) Daniel must recognize $300 interest income for 2012 and a $200 gain on the sale of the bond in 2013.
B) Daniel must recognize $600 interest income for 2012 and a $200 gain on the sale of the bond in 2013.
C) Daniel must recognize $600 interest income for 2012 and a $100 loss on the sale of the bond in 2013.
D) Daniel must recognize $300 interest income for 2012 and a $100 loss on the sale of the bond in 2013.
E) None of the above.
Q2) Ted earned $150,000 during the current year.He paid Alice,his former wife,$75,000 in alimony.Under these facts,the tax is paid by the person who benefits from the income rather than the person who earned the income.
A)True
B)False
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Chapter 5: Gross Income: Exclusions
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Q1) The taxpayer is a Ph.D.student in accounting at City University.The student is paid $1,500 per month for teaching two classes.The total amount received for the year is $13,500.
A) The $13,500 is excludible if the money is used to pay for tuition and books.
B) The $13,500 is taxable compensation.
C) The $13,500 is considered a scholarship and, therefore, is excluded.
D) The $13,500 is excluded because the total amount received for the year is less than her standard deduction and personal exemption.
E) None of the above.
Q2) In 2012,Theresa was in an automobile accident and suffered physical injuries.The accident was caused by Ramon's negligence.In 2013,Theresa collected from his insurance company.She received $15,000 for loss of income,$25,000 punitive damages,and $8,000 for medical expenses which she had deducted on her 2012 tax return (the amount in excess of 7.5% of adjusted gross income).As a result of the above,Theresa's 2013 gross income is increased by $33,000.
A)True
B)False
Q3) What Federal income tax benefits are provided for college students?
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Chapter 6: Deductions and Losses: in General
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Q1) Susan is a sales representative for a U.S.weapons manufacturer.She makes a $100,000 "grease" payment to a U.S.government official associated with a weapons purchase by the U.S.Army.She makes a similar payment to a Saudi Arabian government official associated with a similar sale.Neither of these payments is deductible by Susan's employer.
A)True
B)False
Q2) Tommy,an automobile mechanic employed by an auto dealership,is considering opening a fast food franchise.If Tommy decides not to acquire the fast food franchise,any investigation expenses are:
A) A deduction for AGI.
B) A deduction from AGI, subject to the 2 percent floor.
C) A deduction from AGI, not subject to the 2 percent floor.
D) Deductible up to $5,000 in the current year with the balance being amortized over a 180-month period.
E) Not deductible.
Q3) Describe the circumstances under which a taxpayer can receive rent income from a personal residence,but does not have to report it as gross income.
Q4) Are there any circumstances under which lobbying expenditures are deductible?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) If qualified production activities income (QPAI)cannot be used in the calculation of the domestic production activities deduction in 2012 because of the taxable income limitation,the product of the amount not allowed multiplied by 9% can be carried over for 5 years.
A)True
B)False
Q2) Ivory,Inc.,has taxable income of $600,000 and qualified production activities income (QPAI)of $700,000 in 2012.Ivory's domestic production activities deduction is:
A) $36,000.
B) $42,000.
C) $54,000.
D) $63,000.
E) None of the above.
Q3) Discuss the calculation of nonbusiness deductions for purposes of determining an individual's NOL.
Q4) A theft of investment property can create or increase a net operating loss for an individual.
A)True
B)False
Page 9
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Q1) Tara purchased a machine for $40,000 to be used in her business.The cost recovery allowed and allowable for the three years the machine was used are as follows: If Tara sells the machine after three years for $15,000,how much gain should she recognize?
A) $3,480.
B) $6,360.
C) $9,240.
D) $11,480.
E) None of the above.
Q2) Norm purchases a new sports utility vehicle (SUV)on October 12,2012,for $50,000.The SUV has a gross vehicle weight of 6,200 lbs.It is used 100% of the time for business and it is the only business asset acquired by Norm during 2012.Compute the maximum deduction with respect to the SUV for 2012.Norm does take additional first-year depreciation.
Q3) On April 15,2012,Sam placed in service a storage facility (a single-purpose agricultural structure)costing $80,000.Sam also purchased and planted fruit trees costing $40,000.Sam does not elect to expense any of the acquisitions under § 179.Sam elected not to take additional first-year depreciation.Determine Sam's cost recovery from these two items for 2012.
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) The tax law specifically provides that a taxpayer cannot be temporarily away from home for any period of employment that exceeds one year.
A)True
B)False
Q2) In choosing between the actual expense method and the automatic mileage method, a taxpayer should consider the cost of insurance on the automobile.
A)True
B)False
Q3) For the current football season,Tern Corporation pays $40,000 for a skybox (containing 12 seats)at Veterans Stadium for eight home games.Regular nonskybox seats at each game range from $120 to $150 a seat.In November,a Tern employee and ten clients use the skybox to attend a game.The event is preceded by a bona fide business discussion,and Tern spent $1,000 for food and drinks during the game.What is Tern's deduction?
Q4) For tax purposes,"travel" is a broader classification than "transportation."
A)True
B)False
Q5) Once set for a year,when might the IRS change the rate for the automatic mileage method?
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) Al contributed a painting to the Metropolitan Art Museum of St.Louis,Missouri.The painting,purchased six years ago,was worth $40,000 when donated,and Al's basis was $20,000.If this painting is immediately sold by the museum and the proceeds are placed in the general fund,Al's charitable contribution deduction is $20,000 (subject to percentage limitations).
A)True
B)False
Q2) During 2012,Kathy,who is self-employed,paid $650 per month for an HSA contract that provides medical insurance coverage with a $3,000 deductible.The plan covers Kathy,her husband,and their three children.Of the $650 monthly fee,$300 was for the high-deductible policy,and $350 was deposited into an HSA.How much of the amount paid for the high-deductible policy can Kathy deduct as a deduction for AGI?
Q3) Jerry pays $5,000 tuition to a parochial school run by his church in order to enable his daughter to attend.This is the amount the school charges all students.Part of the tuition payments can be claimed as a charitable contribution.
A)True
B)False
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Chapter 11: Investor Losses
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Q1) Coyote Corporation has active income of $45,000 and a passive loss of $23,000 in the current year.Coyote cannot deduct the $23,000 loss if it is a personal service corporation.
A)True
B)False
Q2) Nora acquired passive activity A several years ago that until 2011 was profitable.However,the activity produced losses of $100,000 in 2011 and $50,000 in 2012.Nora had passive income from activity B of $40,000 in 2011 and $0 in 2012.How much loss is suspended from activity A in each year?
A) $60,000 in 2011 and $50,000 in 2012.
B) $100,000 in 2011 and $50,000 in 2012.
C) $0 in 2011 and $0 in 2012.
D) None of the above.
Q3) When determining whether an individual is a material participant,participation by an owner's spouse generally counts.
A)True
B)False
Q4) Describe the general rules that limit the deduction of investment interest expense.
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Page 13
Chapter 12: Alternative Minimum Tax
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Q1) Prior to the effect of tax credits,Eunice's regular income tax liability is $325,000 and her tentative AMT is $312,000.Eunice has general business credits available of $20,000.Calculate Eunice's tax liability after tax credits.
A) $0.
B) $305,000.
C) $312,000.
D) $325,000.
E) None of the above.
Q2) The required adjustment for AMT purposes for pollution control facilities placed in service in 2012 is equal to the difference between the amortization deduction allowed for regular income tax purposes and the depreciation deduction computed under ADS.
A)True
B)False
Q3) Why is there a need for a second tax system called the alternative minimum tax?
Q4) A tax preference can increase or decrease alternative minimum taxable income while an adjustment can only increase alternative minimum taxable income.
A)True
B)False
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Chapter 13: Tax Credits and Payment Procedures
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Q1) Several years ago,Tom purchased a structure for $300,000 that was originally placed in service in 1929.Three and one-half years ago he incurred qualifying rehabilitation expenditures of $600,000.In the current year,Tom sold the property in a taxable transaction.Calculate the amount of the recapture of the tax credit for rehabilitation expenditures.
A) $0.
B) $24,000.
C) $36,000.
D) $48,000.
E) None of the above.
Q2) Describe the withholding requirements applicable to employers.
Q3) The low-income housing credit is available to low-income tenants who reside in qualifying low-income housing.
A)True
B)False
Q4) A taxpayer who meets the age requirement and receives no Social Security benefits will be entitled to the full tax credit for the elderly.
A)True
B)False
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Q1) Samantha gives her son,Steve,stock (basis of $72,000; fair market value of $68,000)and no gift tax results.When Steve subsequently sells the stock for $69,000,his recognized gain or loss is:
A) $0.
B) ($3,000).
C) $1,000.
D) $69,000.
E) None of the above.
Q2) The amount of a corporate distribution qualifying for capital recovery treatment which exceeds the recipient's stock basis is treated as an ordinary gain.
A)True
B)False
Q3) Why is it generally undesirable to pass property by death when its fair market value is less than basis?
Q4) Realized losses from the sale or exchange of stock are disallowed if within 30 days before or 30 days after the sale or exchange,the taxpayer acquires substantially identical stock.
Q5) What effect does a deductible casualty loss have on the adjusted basis of property?
Page 16
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) Taxpayer owns a home in Atlanta.His company transfers him to Chicago on January 2,2012,and he sells the Atlanta house in early February.He purchases a residence in Chicago on February 3,2012.On December 15,2012,taxpayer's company transfers him to Los Angeles.In January 2013,he sells the Chicago residence and purchases a residence in Los Angeles.Because multiple sales have occurred within a two-year period,§ 121 treatment does not apply to the sale of the second home.
A)True
B)False
Q2) Agnes,a calendar year taxpayer,lists her principal residence with a realtor on January 7,2012,enters into a contract to sell on March 5,2012,and sells (i.e.,the closing date)the residence on May 15,2012.The realized gain on the sale is $240,000.Which date is the appropriate ending date in determining if the residence has been owned and used by the taxpayer as the principal residence for at least two years during the prior five-year period?
A) January 7, 2012.
B) March 5, 2012.
C) May 15, 2012.
D) December 31, 2012.
E) None of the above.
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) Suzy purchased vacant land in 2005 that she subdivided for resale as lots.All 10 of the lots were sold during 2012.The lots had a tax basis of $9,000 each and sold for $45,000 each.Suzy made no substantial improvements to the lots.She acted as her own real estate broker; so there were no sales expenses for selling the lots.Which of the following statements is correct?
A) Suzy must hold the lots for at least 10 years before she is eligible for the special capital gain treatment of § 1237.
B) The $360,000 gain from the sale of the ten lots is all ordinary income.
C) All of the $360,000 gain from the sale of the ten lots is long-term capital gain.
D) To be eligible for the special capital gain treatment of § 1237, Suzy must be a real estate dealer.
E) None of the above.
Q2) Ranja acquires $200,000 face value corporate bonds for $186,000 when the bonds are issued.He holds the bonds as an investment for two years and then sells them for $198,000.He amortizes $2,000 of the OID.What tax issues does Ranja have with respect to these bonds?
Q3) What characteristics must the seller of a patent have in order to be classified as a holder?
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Chapter 17: Property Transactions: Section 1231 and Recapture Provisions
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Q1) Vertigo,Inc.,has a 2012 net § 1231 loss of $64,000 and had a $32,000 net § 1231 gain in 2011.For 2012,Vertigo's net § 1231 loss is treated as:
A) Ordinary loss.
B) Ordinary gain.
C) Capital loss.
D) Capital gain.
E) None of the above.
Q2) Casualty gains and losses from nonpersonal use assets are not netted against casualty gains and losses from personal use assets.
A)True
B)False
Q3) Section 1231 property generally does not include musical compositions.
A)True
B)False
Q4) Property sold to a related party purchaser that is depreciable by the purchaser may cause the seller to have ordinary gain.
A)True
B)False
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Chapter 18: Accounting Periods and Methods
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Q1) Charlotte sold her unincorporated business for $600,000 in 2012.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.
Q2) The accrual method generally is required to report income for which of the following types of businesses:
A) From long-term construction contracts.
B) Earned by an incorporated public accounting firm with gross receipts in excess of $5 million.
C) Earned by a partnership that has a partner that is an S corporation.
D) A grocery store with average annual gross receipts of $800,000.
E) None of the above.
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Chapter 19: Deferred Compensation
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Questions
Q1) Which would not be considered an advantage of a nonqualified stock option plan over an incentive stock option (ISO)plan?
A) Granted at any price.
B) May have any duration.
C) Spread subject to alternative minimum tax.
D) Governed by § 83.
E) All are considered advantages.
Q2) The special § 83(b)election (i.e.,where income is taxed in the year of the grant)with respect to a restricted stock plan may be advantageous in which of the following situations in 2012?
A) The employer is an unstable company.
B) The bargain element is relatively small.
C) A minimum amount of appreciation is expected in the future.
D) The restriction probably will not be satisfied.
E) None of the above.
Q3) If an individual is ineligible to make a deductible contribution to a traditional IRA,nondeductible contributions of any amount can be made to a traditional IRA.
A)True
B)False
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Chapter 20: Corporations and Partnerships
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Q1) Pete contributes land (basis of $80,000; fair market value of $300,000)for a 25% interest in a partnership.The land is subject to a mortgage of $40,000 which the partnership assumes.As a result of the transfer,Pete:
A) Has a basis in the partnership of $50,000.
B) Has a basis in the partnership of $70,000.
C) Has a basis in the partnership of $270,000.
D) Must recognize a gain of $30,000.
E) None of the above.
Q2) If a corporation has no E & P,its shareholders will not have constructive dividends.
A)True
B)False
Q3) The domestic production activities deduction (DPAD)is handled differently for a partnership than for a C corporation.Explain
Q4) For income tax purposes,excess capital losses of individuals and corporations are treated in the same manner.
A)True
B)False
Q5) What causes a partner's basis in a partnership interest to fluctuate?
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