Taxation of Individuals Exam Bank
Course Introduction
This course provides an in-depth examination of federal income tax principles as they apply to individual taxpayers. Topics include the determination of taxable income, computation of tax liability, and the tax treatment of various types of income, deductions, and credits. The course also covers compliance and reporting requirements, tax planning strategies, and an introduction to current issues in individual taxation. Through case studies and practical examples, students will develop a solid understanding of the Internal Revenue Code provisions affecting individuals and gain foundational skills necessary for personal and professional tax preparation.
Recommended Textbook
South Western Federal Taxation 2015 Individual Income Taxes 38th Edition by William
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Page 2
H. Hoffman
Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Sample Questions
Q1) Contributions to charitable organizations are deductible.
A)Economic considerations
B)Social considerations
C)Equity considerations
Answer: B
Q2) Which,if any,of the following provisions cannot be justified as mitigating the effect of the annual accounting period concept?
A)Nonrecognition of gain allowed for involuntary conversions.
B)Net operating loss carryback and carryover provisions.
C)Carry over of excess charitable contributions.
D)Use of the installment method to recognize gain.
E)Carry over of excess capital losses.
Answer: A
Q3) An inheritance tax is a tax on a decedent's right to pass property at death.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Working With the Tax Law
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Q1) The following citation can be a correct citation: Rev.Rul.95-271,1995-64 I.R.B.18.
A)True
B)False Answer: False
Q2) Electronic databases are most frequently searched by the keyword approach.
A)True
B)False Answer: True
Q3) A taxpayer can obtain a jury trial in the U.S.Tax Court.
A)True
B)False Answer: False
Q4) The IRS is not required to make a letter ruling public.
A)True
B)False Answer: False
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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) In satisfying the support test and the gross income test for claiming a dependency exemption,a scholarship received by the person being claimed is handled the same way for each test.Do you agree or disagree with this statement? Why?
Answer: Disagree.For purposes of the support test,all of the scholarship is disregarded.For purposes of the gross income test,only the taxable part is considered (i.e. ,the nontaxable part is disregarded).
Q2) Sarah furnishes more than 50% of the support of her son and daughter-in-law who live with her.If the son and daughter-in-law file a joint return,Sarah cannot claim them as dependents.
A)True
B)False
Answer: False
Q3) A son lives with taxpayer and earns $3,000.
A)Could be a qualifying child.
B)Could be a qualifying relative.
C)Could be either a qualifying child or a qualifying relative.
D)Could be neither a qualifying child nor a qualifying relative.
Answer: C
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Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) Samantha and her son,Brent,are cash basis taxpayers.Samantha gave Brent a corporate bond with a face amount and fair market value of $10,000.On the date of the gift,March 31,2014,the accrued interest on the bond was $100.On December 31,2014,Brent collected $400 interest on the bond.Brent must include in gross income the $300 interest earned after the date of the gift.
A)True
B)False
Q2) Linda delivers pizzas for a pizza shop.On Wednesday,December 31,2014,Linda made several deliveries and collected $400 from customers.However,Linda forgot to turn in the proceeds for the day to her employer until the following Friday,January 2,2015.The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2015.
A)True
B)False
Q3) A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1,2013 that will pay $1,100 upon its maturity on June 30,2015.The taxpayer must recognize a portion of the income in 2014.
A)True
B)False
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Chapter 5: Gross Income: Exclusions
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Sample Questions
Q1) Julie was suffering from a viral infection that caused her to miss work for 90 days.During the first 30 days of her absence,she received her regular salary of $8,000 from her employer.For the next 60 days,she received $12,000 under an accident and health insurance policy purchased by her employer.The premiums on the health insurance policy were excluded from her gross income.During the last 30 days,Julie received $6,000 on an income replacement policy she had purchased.Of the $26,000 she received,Julie must include in gross income:
A)$0.
B)$6,000.
C)$8,000.
D)$14,000.
E)$20,000.
Q2) The taxpayer's marginal tax bracket is 25%.Which would the taxpayer prefer?
A)$1.00 taxable income rather than $1.25 tax-exempt income.
B)$1.00 taxable income rather than $.75 tax-exempt income.
C)$1.25 taxable income rather than $1.00 tax-exempt income.
D)$1.40 taxable income rather than $1.00 tax-exempt income.
E)None of these.
Q3) What Federal income tax benefits are provided for college students?
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Page 7
Chapter 6: Deductions and Losses: in General
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Sample Questions
Q1) Two-thirds of treble damage payments under the antitrust law are not deductible.
A)True
B)False
Q2) Which of the following statements is correct in connection with the investigation of a business?
A)If the taxpayer is not already engaged in the trade or business,the expenses incurred are deductible if the project is abandoned.
B)If the business is acquired,the expenses may be deducted immediately by a taxpayer engaged in a similar trade or business regardless of whether the business being investigated is acquired.
C)That business must be related to the taxpayer's present business for any expense ever to be deductible.
D)Regardless of whether the taxpayer is already engaged in the trade or business,the expenses must be capitalized and amortized.
E)None of these.
Q3) What losses are deductible by an individual taxpayer?
Q4) Briefly discuss the disallowance of deductions for capital expenditures.
Q5) Under what circumstance can a bribe be deducted?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) If qualified production activities income (QPAI)cannot be used in the calculation of the domestic production activities deduction in 2014 because of the taxable income limitation,the product of the amount not allowed multiplied by 9% can be carried over for 5 years.
A)True
B)False
Q2) Nora,single,had the following income and deductions for 2014:
Sales <sup>$ 50,000</sup>
Business expenses <sup>(100,000)</sup>
Alimony received <sup>30,000</sup>
Interest income <sup>1,000</sup>
Dividends <sup>2,000</sup>
Nonbusiness capital gains <sup>4,000</sup>
§ 1244 stock loss <sup>(18,000)</sup>
Itemized deductions <sup>(4,000)</sup>
Business capital loss <sup>(2,000)</sup>
Business capital gain <sup>1,000</sup>
Compute Nora's net operating loss for 2014.
Q3) Identify the factors that should be considered in determining whether a transaction is a business bad debt or a nonbusiness bad debt.
Page 9
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) Antiques may be eligible for cost recovery if they are used in a trade or business.
A)True
B)False
Q2) Residential rental real estate includes property where 80% or more of the net rental revenues are from nontransient dwelling units.
A)True
B)False
Q3) Property which is classified as personalty may be depreciated. A)True
B)False
Q4) Motel buildings have a cost recovery period of 27.5 years. A)True
B)False
Q5) Under MACRS,if the mid-quarter convention is applicable,all property sold is treated as being sold at the mid-point of the quarter in which it is placed in service. A)True
B)False
Q6) Discuss the reason for the inclusion amount with respect to leased automobiles.
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) After graduating from college with a degree in chemistry,Alberto obtains a job as a chemist with DuPont.Alberto's job search expenses qualify as deductions.
A)True
B)False
Q2) Distance test (for moving expenses)not satisfied
A)Cover charge paid to entertain client at a night club.
B)Deductible even if taxpayer does not take the new job
C)Company picnic sponsored by employer
D)Use of Federal per diem allowance to substantiate meals while in travel status
E)Does not have to be job related
F)Can include cost of car insurance and automobile club dues
G)Distribution from plan is taxable
H)Distribution from plan is not taxable
I)Expatriate (U.S.person who is employed overseas)returns home to retire
J)Taxpayer moves to a new residence 55 miles closer to his present job
K)Country club membership fee
L)Correct match not provided
Q3) Lynn determines when the services are to be performed.
A)Indicates employee status.
B)Indicates independent contractor status.
Page 11
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) Helen pays nursing home expenses of $3,000 per month for her mother.The monthly charge covers the following items: $1,400 for medical care,$900 for lodging,and $700 for food.Under what circumstances can Helen include the $3,000 per month payment when computing her medical expense deduction for the year? If Helen is not allowed to include the entire payment,how much can she include?
Q2) For the past several years,Jeanne and her two sisters have taken turns claiming a dependency exemption deduction for their mother under a multiple support agreement.This year Jeanne will be entitled to the exemption,and her mother needs money for surgery and new eyeglasses.Should Jeanne pay for the medical expenses as her share of her mother's expenses? How would this benefit Jeanne?
Q3) The election to itemize is appropriate when total itemized deductions are less than the standard deduction based on the taxpayer's filing status.
A)True
B)False
Q4) A phaseout of certain itemized deductions applies for all taxpayers who choose to itemize their deductions.
A)True
B)False
Page 12
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Chapter 11: Investor Losses
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Sample Questions
Q1) Investment income can include gross income from interest,dividends,annuities,and royalties not derived in the ordinary course of a trade or business;income from a passive activity;and income from a real estate activity in which the taxpayer actively participates.
A)True
B)False
Q2) Josh has investments in two passive activities.Activity A (acquired three years ago)produces income of $30,000 this year,while Activity B (acquired two years ago)produces a loss of $50,000.What is the amount of Josh's suspended loss for the year?
A)$0
B)$18,000
C)$20,000
D)$50,000
E)None of these
Q3) What special passive loss treatment is available to real estate activities?
Q4) In 2014,Emily invests $120,000 in a limited partnership that is not a passive activity.During 2014,her share of the partnership loss is $90,000.In 2015,her share of the partnership loss is $50,000.How much can Emily deduct in 2014 and 2015?
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Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) 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.
Q2) 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 these
Q3) Vinny's AGI is $250,000.He contributed $200,000 in cash to the Boy Scouts,a public charity.What is Vinny's charitable contribution deduction for AMT purposes?
A)$0
B)$50,000
C)$75,000
D)$125,000
E)None of these
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Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) In terms of the withholding procedures,which statement does not reflect current rules?
A)Penalties can be imposed for filing false information with respect to wage withholding.
B)An employer need not verify the number of exemptions claimed by an employee on Form W4 (Employee's Withholding Allowance Certificate).
C)An employee may claim fewer than the number of withholding allowances allowed,but not more.
D)In preparing the income tax return for the year,the employee is bound by the number of exemptions claimed for withholding purposes.
E)None of these.
Q2) The purpose of the tax credit for rehabilitation expenditures is to encourage the relocation of businesses from older,economically distressed areas (i.e. ,inner city)to newer locations.
A)True
B)False
Q3) Discuss the treatment of unused general business credits.
Q4) Describe the withholding requirements applicable to employers.
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Sample Questions
Q1) Over the past 20 years,Alfred has purchased 380 shares of Green,Inc. ,common stock.His first purchase was in 1993 when he acquired 30 shares for $20 a share.In 1998,Alfred bought 150 shares at $10 a share.In 2013,Alfred acquired 200 shares at $50 a share.Alfred intends to sell 125 shares at $60 per share in the current year (2014).If Alfred's objective is to minimize gain and assuming he can adequately identify the shares to be sold,what is his recognized gain?
A)$1,250
B)$3,520
C)$5,950
D)$6,250
E)None of these
Q2) If a taxpayer purchases a business and the price exceeds the fair market value of the listed assets,how is the excess allocated among the purchased assets?
Q3) Ollie owns a personal use car for which he originally paid $48,000.He trades the car in on a sports utility vehicle (SUV)paying the automobile dealer cash of $30,000.If the negotiated price of the SUV is $49,000,what is Ollie's recognized gain or loss and his adjusted basis for the SUV?
Q4) Define a bargain purchase of property and discuss the related tax consequences.
Page 16
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) Fran was transferred from Phoenix to Atlanta.She sold her Phoenix residence (adjusted basis of $250,000)for a realized loss of $50,000 and purchased a new residence in Atlanta for $375,000.Fran had owned and lived in the Phoenix residence for 6 years.What is Fran's recognized gain or loss on the sale of the Phoenix residence and her basis for the residence in Atlanta?
A)$0 and $375,000.
B)$0 and $425,000.
C)($50,000)and $325,000.
D)($50,000)and $375,000.
E)None of these.
Q2) Use the following data to determine the sales price of Etta's principal residence and the realized gain.She is not married.The sale of the old residence qualifies for the § 121 exclusion.
\(\begin{array}{ll}
\text { Selling expenses } & \$ 45,000 \\
\text { Recognized gain } & 180,000 \\
\text { Cost of new residence } & 760,000 \\
\text { Adjusted basis of old residence } & 225,000 \\
\S 121 \text { exclusion } & 250,000
\end{array}\)
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Chapter 16: Property Transactions: Capital Gains and Losses
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Sample Questions
Q1) Hilda lent $2,000 to a close personal friend to help the friend avoid overdrawing the friend's checking account.The friend was supposed to repay the $2,000 within a month.Instead,the friend declared personal bankruptcy and Hilda will never recover any of the $2,000.What are the tax implications of these events for Hilda?
Q2) The holding period of property given up in a like-kind exchange includes the holding period of the asset received if the property that has been exchanged is a capital asset.
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?
Q4) Lease cancellation payments received by a lessor are always ordinary income because they are considered to be in lieu of rental payments. A)True B)False
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Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Sample Questions
Q1) An individual has the following recognized gains and losses from disposition of § 1231 assets (all the assets were vacant land): $15,000 gain,$10,000 loss,$25,000 gain,and $2,000 loss.The individual has a $5,500 § 1231 lookback loss.The individual also has a $16,000 net short-term capital loss from the disposition of stock.Which of the following statements is correct?
A)The taxpayer has $5,500 ordinary gain and $6,500 net long-term capital gain.
B)The taxpayer has $12,000 net long-term capital gain.
C)The taxpayer has $28,000 ordinary gain and $16,000 net short-term capital loss.
D)The taxpayer has $5,500 ordinary loss and $6,500 net long-term capital gain.
E)None of these.
Q2) If § 1231 asset casualty gains and losses net to a gain,the gain is treated as a § 1231 gain.
A)True
B)False
Q3) A sheep must be held more than 18 months to qualify as a § 1231 asset.
A)True
B)False
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Chapter 18: Accounting Periods and Methods
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Q1) In the case of a taxpayer who uses the lower-of-cost-or-market inventory method:
A)Taxpayers may not use the lower of cost or market method for tax purposes.
B)Market price means the expected selling price.
C)Taxpayers may deduct a reserve for anticipated inventory price changes.
D)Each inventory item must be valued at the lower of its cost or its market value.
E)None of these.
Q2) A cash basis taxpayer sold investment land in 2014 for $200,000.He received $40,000 in the year of sale and $160,000 in 2015.The cost of the land was $80,000.Under the installment method,the taxpayer would report a $24,000 gain in 2014.
A)True
B)False
Q3) Teal,Inc. ,used the lower of cost or market to value inventory in 2014.The ending inventory at cost was $400,000 and the ending inventory at market was $385,000.In 2015,Teal changed to the LIFO method.The company's beginning LIFO inventory is $400,000.
A)True
B)False
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Chapter 19: Deferred Compensation
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Q1) Which statement is true with respect to golden parachute payments?
A)Refers to excess severance pay.
B)Does not include payments from a qualified profit sharing plan.
C)A deduction is denied to the employer.
D)A 20% excise tax is imposed on the recipient.
E)All of these are true.
Q2) Explain to a small business owner some advantages and disadvantages of a simplified employee pension plan (SEP).
Q3) The compensation paid by Purple Corporation to the plan participants of a profit sharing plan in 2014 was $38,300.During 2014,Purple Corporation contributed $10,000 to the plan.Purple's deductible amount for 2014 is what amount,if any?
A)$0
B)$7,660
C)$9,575
D)$10,000
E)None of these
Q4) Group life insurance is considered a deferred compensation plan.
A)True
B)False
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Chapter 20: Corporations and Partnerships
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Q1) Organizational expenditures include the costs of transferring assets to the new corporation.
A)True
B)False
Q2) To improve its liquidity,the shareholders of Spoonbill Corporation make a capital contribution of $200,000 in cash.To facilitate the building of a manufacturing plant,the City of Wichita donates land (worth $800,000)to Spoonbill Corporation.As a result of these transactions,Spoonbill has:
A)No income and a basis in the land of zero.
B)Income of $1 million and a basis in the land of zero.
C)Income of $800,000 and a basis in the land of $800,000.
D)No income and a basis in the land of $800,000.
E)None of these.
Q3) Like individuals,corporations can take advantage of § 1031 to elect to defer recognizing gain on likekind exchanges.
A)True
B)False
Q4) Regarding the tax treatment of charitable contributions,corporations enjoy two major advantages over individuals.Elaborate.
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