Taxation Principles
Exam Materials
Course Introduction
Taxation Principles provides students with a fundamental understanding of tax systems, the rationale behind taxation, and its role in economic and social policy. The course covers key concepts such as tax incidence, types of taxes (income, corporate, sales, property, and international), tax administration, and compliance. Students will explore the impact of taxation on business and personal financial decision-making, as well as the ethical and legal considerations associated with tax planning. Practical exercises and case studies illustrate the application of these principles in real-world contexts, preparing students for further study or professional roles in accounting, law, and public administration.
Recommended Textbook
McGraw Hills Taxation of Individuals and Business Entities 7th Edition by Spilker
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25 Chapters
2779 Verified Questions
2779 Flashcards
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Chapter 1: An Introduction to Tax
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Sample Questions
Q1) Earmarked taxes are:
A) Taxes assessed only on certain taxpayers
B) Taxes assessed to fund a specific purpose
C) Taxes assessed for only a specific time period
D) Taxes assessed to discourage less desirable behavior
E) None of these
Answer: B
Q2) Marc, a single taxpayer, earns $60,000 in taxable income and $5,000 in interest from an investment in city of Birmingham Bonds. Using the U.S. tax rate schedule for year 2014, what is his current marginal tax rate?
A) 15.00%
B) 25.00%
C) 28.00%
D) 33.00%
E) None of these
Answer: B
Q3) Property taxes may be imposed on both real and personal property.
A)True
B)False
Answer: True
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Chapter 2: Tax Compliance, the Irs, and Tax Authorities
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Sample Questions
Q1) Under the tax law, taxpayers may be subject to both civil and criminal penalties for underpaying their tax liability (e.g., due to fraud).
A)True
B)False
Answer: True
Q2) Dan received a letter from the IRS that gave him the choice of (1) requesting a conference with an Appeals Officer or (2) agreeing to a proposed tax adjustment. Dan received the:
A) 30-day letter.
B) 90-day letter.
C) Appeals letter.
D) Tax adjustment letter.
E) None of these.
Answer: A
Q3) The statute of limitations for IRS assessment generally ends four years after the date a tax return is filed.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Tax Planning Strategies and Related Limitations
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110 Verified Questions
110 Flashcards
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Sample Questions
Q1) Which of the following is an example of the conversion strategy?
A) A corporation paying its shareholders a $20,000 dividend
B) A corporation paying its owner a $20,000 salary
C) A high tax rate taxpayer investing in tax exempt municipal bonds
D) A cash-basis business delaying billing its customers until after year end
E) None of these
Answer: C
Q2) If tax rates will be higher next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.
A)True
B)False
Answer: False
Q3) When considering cash inflows, higher present values are preferred. A)True
B)False
Answer: True
Q4) The constructive receipt doctrine is more of an issue for cash basis taxpayers.
A)True
B)False
Answer: True
Page 5
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Chapter 4: Individual Income Tax Overview, Exemptions, and Filing Status
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Sample Questions
Q1) The relationship requirement is more broadly defined (includes more relationships) for a qualifying relative than it is for a qualifying child.
A)True
B)False
Q2) A taxpayer may qualify for the head of household filing status if she has no dependent children but pays more than half of the cost of maintaining a separate household for her dependent mother and/or father.
A)True
B)False
Q3) All of the following are tests for determining qualifying relative status except ______.
A) relationship test
B) gross income test
C) support test
D) residence test
Q4) Taxpayers may prepay their tax liability through withholdings and through estimated tax payments.
A)True
B)False
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Chapter 5: Gross Income and Exclusions
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Sample Questions
Q1) The principle of realization for tax purposes is very different from realization as it is understood for financial reporting purposes.
A)True
B)False
Q2) For tax purposes, unearned income means income that has not yet been realized.
A)True
B)False
Q3) Jack and Jill are married. This year Jack earned $72,000 and Jill earned $80,000 and they received $4,000 of interest income from a joint savings account. How much gross income would Jack report if he files married-separate from Jill?
A) $72,000 if they reside in a common law state.
B) $76,000 if they reside in a community property law state.
C) $84,000 if they reside in a common law state.
D) $78,000 if they reside in a community property law state.
E) All of these
Q4) A taxpayer generally includes in gross income the amount of debt forgiven by a lender.
A)True
B)False
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Chapter 6: Individual Deductions
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Sample Questions
Q1) Casey currently commutes 35 miles to work in the city. He is considering a new assignment in the suburbs on the other side of the city that would increase his commute considerably. He would like to accept the assignment, but he thinks it might require that he move to the other side of the city. Which of the following is a true statement?
A) Casey can deduct moving expenses if the distance between his current residence and his new assignment is at least 50 miles.
B) If Casey's move qualifies for the moving expense deduction, he can deduct the cost of meals while en route to his new residence.
C) To qualify for a moving expense deduction the new commute from Casey's current residence would need to be a minimum of 85 miles.
D) If Casey's move qualifies for the moving expense deduction, he can deduct half the cost of meals while en route to his new residence.
E) All of these are false.
Q2) Rental or royalty expenses are deductible "for" AGI.
A)True
B)False
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Chapter 7: Individual Income Tax Computation and Tax Credits
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Sample Questions
Q1) Alton reported net income from his sole proprietorship of $90,000. To determine his self employment tax, he would multiply $90,000 by the self-employment tax rate.
A)True
B)False
Q2) Jocelyn, a single taxpayer, had $742,000 of taxable income in 2014. All of the income is ordinary. What is her tax liability for the year?
Q3) Miley, a single taxpayer, plans on reporting $27,900 of taxable income this year (all of her income is from a part-time job). She is considering applying for a second part-time job that would give her an additional $10,000 of taxable income. By how much will the income from the second job increase her tax liability (use the tax rate schedules)?
A) $1,000
B) $1,500
C) $1,600
D) $2,500
Q4) Paul and Melissa plan on filing jointly in 2014. For the year, the couple reported taxable income of $130,000. What is their gross tax liability?
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Page 9
Chapter 8: Business Income, Deductions, and Accounting Methods
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Sample Questions
Q1) Which of the following is NOT considered a related party for the purpose of limitation on accruals to related parties?
A) Spouse when the taxpayer is an individual.
B) A partner when the taxpayer is a partnership.
C) Brother when the taxpayer is an individual.
D) A minority shareholder when the taxpayer is a corporation.
E) All of these are related parties.
Q2) Bill operates a proprietorship using the cash method of accounting, and this year he received the following payments: $100 in cash from a customer for services rendered this year
a promise to pay $200 from a customer for services rendered this year tickets to a football game worth $250 as payment for services performed last year a check for $170 for services rendered this year that Bill forgot to cash
How much income should Bill realize on Schedule C?
A) $100
B) $300
C) $350
D) $270
E) $520
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Chapter 9: Property Acquisition and Cost Recovery
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Sample Questions
Q1) In general, major integrated oil and gas producers may take the greater of cost or percentage depletion.
A)True
B)False
Q2) Flax, LLC purchased only one asset during 2014. Flax placed in service a computer (5-year property) on January 16 with a basis of $14,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation).
Q3) Phyllis purchased $8,000 of specialized audio equipment that she uses in her business regularly. Occasionally, she uses the equipment for personal use. During the first year, Phyllis used the equipment for business use 70 percent of the time; however, during the current (second) year the business use fell to 40 percent. Assume that the equipment is seven-year MACRS property and is under the half-year convention. Assume the ADS recovery period is 10 years. What is the depreciation allowance for the current year, rounded to the nearest whole number?
Q4) Taxpayers may use historical data to determine the recovery period for tax depreciation.
A)True
B)False
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Page 11
Chapter 10: Property Dispositions
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Sample Questions
Q1) Bozeman sold equipment that it uses in its business for $80,000. Bozeman bought the equipment two years ago for $75,000 and has claimed $20,000 of depreciation expense. What is the amount and character of Bozeman's gain or loss?
A) $25,000 §1231 gain.
B) $20,000 ordinary gain, and $5,000 §1231 gain.
C) $5,000 ordinary gain, and $20,000 §1231 gain.
D) $25,000 capital gain.
E) None of these.
Q2) Bateman Corporation sold an office building that it used in its business for $800,000. Bateman bought the building ten years ago for $600,000 and has claimed $200,000 of depreciation expense. What is the amount and character of Bateman's gain or loss?
A) $40,000 ordinary and $360,000 §1231 gain.
B) $200,000 ordinary and $200,000 §1231 gain.
C) $400,000 ordinary gain.
D) $400,000 capital gain.
E) None of these.
Q3) Losses on sales between related parties are realized but not recognized.
A)True
B)False
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Page 12
Chapter 11: Investments
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104 Flashcards
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Sample Questions
Q1) When selling stocks, which method of calculating basis provides the greatest opportunity for minimizing gains or increasing losses?
A) LIFO
B) FIFO
C) Weighted average
D) Specific identification
E) None of these
Q2) §529 plans are limited to a yearly contribution of $2,000 for each beneficiary and can only be used to pay for qualified educational costs incurred from kindergarten through 12th grade.
A)True
B)False
Q3) Losses associated with personal-use assets, sales to related parties, and wash sales are not currently deductible.
A)True
B)False
Q4) Investment expenses and investment interest expense are for AGI deductions.
A)True
B)False
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Chapter 12: Compensation
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102 Flashcards
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Sample Questions
Q1) When stock options are exercised they are converted into actual employer stock.
A)True
B)False
Q2) Lina, a single taxpayer with a 35 percent marginal tax rate, desires health insurance. The health insurance would cost Lina $8,000 to purchase if she pays for it herself (Lina's AGI is too high to receive any tax deduction for the insurance as a medical expense). Lina's employer has a 30 percent marginal tax rate. What is the maximum amount of before-tax salary Lina would give up to receive health insurance?
Q3) One purpose of Form W-4 is to determine an employee's withholding.
A)True
B)False
Q4) The date on which stock options are no longer subject to forfeiture is called the vesting date.
A)True
B)False
Q5) Employers sometimes pay a gross-up to employees to cover taxes associated with taxable fringe benefits they provide.
A)True
B)False
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Chapter 13: Retirement Savings and Deferred Compensation
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Sample Questions
Q1) Which of the following statements regarding Roth IRAs is false?
A) Contributions to Roth IRAs are not deductible.
B) Qualifying distributions from Roth IRAs are not taxable.
C) Whether or not they participate in an employer-sponsored retirement plan, taxpayers are allowed to contribute to Roth IRAs as long as their AGI does not exceed certain thresholds.
D) Taxpayers who are married and file separately are not allowed to contribute to a Roth IRA.
Q2) Kathy is 60 years of age and self-employed. During the year she reported $100,000 of revenues and $40,000 of expenses relating to her self-employment activities. If Kathy has no other retirement accounts in her name, what is the maximum amount she can contribute to an individual 401(k)?
A) $28,652
B) $34,152
C) $52,000
D) $57,500
Q3) High-income taxpayers are not allowed to receive the saver's credit.
A)True
B)False
Page 15
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Chapter 14: Tax Consequences of Home Ownership
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Sample Questions
Q1) Several years ago, Chara acquired a home that she vacationed in part of the time and she rented part of the time. During the current year Chara: Personally stayed in the home for 14 days, Rented it at full fair market value to her parents for eight days, Rented it to her sister for five days at half price, Rented it to her friend at a discounted rate for three days, Rented it to another friend at fair market value for six days, Rented the home to third parties for 42 days at the market rate, Did repair and maintenance work for three days to keep the home ready for renters, and
Marketed the property and made it available for rent for 120 days during the year even though it was not rented during this time. How many days of personal use and how many days of rental use did Chara experience on the property during the year?
Q2) A self-employed taxpayer reports home office expenses as for AGI deductions while employees report home office expenses as from AGI deductions.
A)True
B)False
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Page 16
Chapter 15: Entities Overview
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Sample Questions
Q1) Sole proprietors are subject to self-employment taxes on net income from their sole proprietorships.
A)True
B)False
Q2) David would like to organize HOS as either an LLC or as a corporation generating a 12 percent annual before-tax return on a $300,000 investment. Individual and corporate tax rates are both 30 percent and individual capital gains and dividend tax rates are 15 percent. HOS will pay out its after-tax earnings every year to either its members or its shareholders.
a. Ignoring self-employment taxes, how much would David keep after taxes if HOS is organized as either an LLC or a corporation?
b. Ignoring self-employment taxes, what are the overall tax rates (combined owner and entity level) if HOS is organized as either an LLC or a corporation?
Q3) Limited partnerships are legally formed by filing a certificate of limited partnership with the state in which the partnership will be organized.
A)True
B)False
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Page 17
Chapter 16: Corporate Operations
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Sample Questions
Q1) Which of the following describes the correct treatment of incentive stock options (ISOs) granted when ASC 718 (a codification of FAS 123R) applies?
A) Financial accounting-no expense; tax-no deduction
B) Financial accounting-no expense; tax-deduct bargain element at exercise
C) Financial-expense value over vesting period; tax-no deduction
D) Financial-expense value over vesting period; tax-deduct bargain element at exercise
Q2) A corporation may carry a net capital loss forward five years to offset capital gains in future years but it may not carry a net capital loss back to offset capital gains in previous years.
A)True
B)False
Q3) Which of the following is unnecessary to allow an accrual-method corporation to deduct charitable contributions before actually paying the contribution to charity?
A) Approval of the payment from the board of directors.
B) Approval from the IRS prior to making the contribution.
C) Payment made within two and one-half months of the tax year end.
D) All of these are necessary.
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Page 18
Chapter 17: Accounting for Income Taxes
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Sample Questions
Q1) A company's effective tax rate can best be described as:
A) The company's cash taxes paid divided by taxable income
B) The company's cash taxes paid divided by net income from continuing operations
C) The company's financial statement income tax provision divided by taxable income
D) The company's financial statement income tax provision divided by net income from continuing operations
Q2) Lynch Company had a net deferred tax asset of $68,000 at the beginning of the year, representing a net taxable temporary difference of $200,000. During the year, Lynch reported pretax book income of $800,000. Included in the computation were favorable temporary differences of $20,000 and unfavorable temporary differences of $50,000. During the year, the company's tax rate decreased from 34% to 30%. Lynch's deferred income tax expense or benefit for the current year would be:
A) Net deferred tax benefit of $9,000
B) Net deferred tax expense of $9,000
C) Net deferred tax benefit of $1,000
D) Net deferred tax expense of $1,000
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19
Chapter 18: Corporate Taxation: Nonliquidating Distributions
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Sample Questions
Q1) Which of the following statements is true?
A) All stock redemptions are treated as exchanges for tax purposes.
B) A stock redemption not treated as an exchange will automatically be treated as a taxable dividend.
C) All stock redemptions are treated as dividends if received by an individual.
D) A stock redemption is treated as an exchange only if it meets one of three stock ownership tests described in the Internal Revenue Code.
Q2) Montclair Corporation had current and accumulated E&P of $500,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Molly Pitcher. The land's fair market value was $200,000 and its tax and E&P basis to Montclair was $50,000. Molly assumed a liability of $25,000 attached to the land. The tax consequences of the distribution to Montclair in 20X3 would be:
A) No gain recognized and a reduction in E&P of $200,000
B) $150,000 gain recognized and a reduction in E&P of $200,000
C) $150,000 gain recognized and a reduction in E&P of $175,000
D) No gain recognized and a reduction in E&P of $175,000
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Chapter 19: Corporate Formation, Reorganization, and Liquidation
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Sample Questions
Q1) Gain or loss is always recognized when realized for tax purposes.
A)True
B)False
Q2) Francine incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation's stock. The property transferred to the corporation had the following fair market values and tax-adjusted bases. \[\begin{array} { l r l r }
& { \text { FMV } } & & { \text { Adjusted basis } } \\
\text { Inventory } & \$ 30,000 & & \$ 10,000 \\
\text { Building } & 130,000 & & 80,000 \\
\text { Land } & \underline { 50,000 } & & \underline { 100,000 } \\
\text { Total } & \$ 210,000 & & \$ \underline { \underline { 190,000 } }
\end{array}\] The corporation also assumed a mortgage of $60,000 attached to the building and land. The fair market value of the corporation's stock received in the exchange was $150,000.
What amount of gain or loss does Francine recognize on the transfer of the property to her corporation?
Q3) What amount of gain or loss does Gary recognize in the complete liquidation?
Q4) What amount of gain or loss does Amelia recognize in the complete liquidation?
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Chapter 20: Forming and Operating Partnerships
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Q1) Tim, a real estate investor, Ken, a dealer in securities, and Hardware, Inc., a retail lumber store form a partnership called HKT, LP. HKT is in the home building business. Tim recently purchased his interest in HKT while the other partners purchased their interest several years ago. During X3, HKT reports a $12,000 gain from the sale of a stock in a wholesale lumber company it purchased in X1 for investment purposes. Which of the following statements best represents how their portion of the gain should be reported to the partner?
A) Tim - Short-term capital gain
B) Ken - Ordinary Income
C) Hardware, Inc. - Long-term capital gain
D) All of these accurately report the gain to the partner
E) None of these accurately report the gain to the partner
Q2) In what order are the loss limitations for partnerships applied?
A) Tax Basis - At-Risk Amount - Passive Activity Loss
B) Passive Activity Loss - Tax Basis - At-Risk Amount
C) At-Risk Amount - Passive Activity Loss - Tax Basis
D) At-Risk Amount - Tax Basis - Passive Activity Loss
Q3) Partnerships tax rules incorporate both the entity and aggregate approaches.
A)True
B)False
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Chapter 21: Dispositions of Partnership Interests and Partnership Distributions
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Q1) A partner's debt relief from the sale of a partnership interest will decrease his outside basis.
A)True
B)False
Q2) A partner recognizes a loss when he receives cash and other property with inside bases greater than his outside basis in a liquidating distribution.
A)True
B)False
Q3) Which of the following statements regarding a partner's basis of inventory received in a liquidating distribution is true?
A) Partners may either increase or decrease the basis in inventory distributed in a liquidating distribution.
B) Partners may only increase the basis in inventory distributed in a liquidating distribution.
C) Partners may only decrease the basis in inventory distributed in a liquidating distribution.
D) None of these statements is true.
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Page 23
Chapter 22: S Corporations
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Q1) During 2014, CDE Corporation (an S corporation since its inception in 2012) distributed a parcel of land to its sole shareholder Clark. The fair market value of the land at the time of the distribution was $80,000 and CDE's tax basis in the property was $30,000. Before considering the effects of the distribution, Clark's basis in his CDE stock was $10,000. What amount of gain, if any, does CDE recognize on the distribution? What amount of income, if any, does Clark recognize on the distribution and what is Clark's basis in his CDE stock after accounting for the distribution?
Q2) Differences in voting powers are permissible across shares of S corporation stock as long as the shares have identical distribution and liquidation rights.
A)True
B)False
Q3) After terminating or voluntarily revoking S corporation status, a corporation may elect it again, but it generally must wait until the beginning of the third tax year after the tax year in which it terminated the election.
A)True
B)False
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Chapter 23: State and Local Taxes
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Q1) Which of the following is not a nonincome based tax?
A) Ohio Commercial Activity Tax.
B) Texas Margin Tax.
C) Washington Business & Occupation Tax.
D) Wisconsin Separate Corporate Tax.
Q2) Which of the following activities will create sales tax nexus?
A) Advertising using television commercials.
B) Salesmen who only take orders.
C) Delivery of sales by UPS.
D) Electronic delivery of software.
Q3) The property factor is the average of beginning and ending property values.
A)True
B)False
Q4) Businesses engaged in interstate commerce are subject to tax in every state where they operate.
A)True
B)False
Q5) Rental income is allocated to the state of commercial domicile.
A)True
B)False
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Chapter 24: The Us Taxation of Multinational Transactions
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Q1) A hybrid entity established in Ireland is treated as a flow-through entity for U.S. tax purposes and a corporation for Irish tax purposes.
A)True
B)False
Q2) Which of the following tax benefits does not arise when a U.S. corporation forms a corporation in Ireland through which to earn business profits in Ireland?
A) Potential deferral of U.S. tax on income earned by the corporation.
B) Treaty benefits on cross border payments between the Irish corporation and the U.S. corporation.
C) Use of transfer pricing to shift income between the United States and Ireland.
D) Flow-through of losses from the Irish corporation to the tax return of the U.S. corporation.
Q3) Nexus involves the criteria used by a government to assert its right to tax a person or transaction within or without its borders.
A)True
B)False
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Chapter 25: Transfer Taxes and Wealth Planning of the Cfa Institute
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Q1) Madison was married at the time of her death and her gross estate consisted of $22 million in stock and bonds. Madison left all of her property to her spouse. What is the result?
A) Madison's taxable estate will be zero.
B) Madison's surviving spouse will have an income tax basis in the inherited property of zero.
C) Madison's adjusted gross estate will be zero.
D) Madison's estate will have a tentative estate tax of zero.
E) None of these.
Q2) A fiduciary is a legal entity that can only exist for a year.
A)True B)False
Q3) The probate estate consists of all property owned by the decedent that is excluded from the gross estate.
A)True B)False
Q4) The amount of the estate tax is directly related to the amount of taxable gifts. A)True
B)False
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