Federal Taxation
Midterm Exam
Course Introduction
Federal Taxation introduces students to the principles and practices governing the federal tax system in the United States. The course covers topics such as income determination, tax liability, deductions, credits, and the filing requirements for individuals and business entities. Students will study the Internal Revenue Code, IRS regulations, and tax-related case law, providing a foundation for understanding compliance and planning strategies. Emphasis is placed on real-world applications, ethical considerations, and current developments in tax legislation, preparing students for roles in accounting, finance, and business decision-making.
Recommended Textbook
South western Federal Taxation 2017 Comprehensive Edition 40th 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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Sample Questions
Q1) Both economic and social considerations can be used to justify:
A)Favorable tax treatment for accident and health plans provided for employees and financed by employers.
B)Disallowance of any deduction for expenditures deemed to be contrary to public policy (e.g., fines, penalties, illegal kickbacks, bribes to government officials).
C)Various tax credits, deductions, and exclusions that are designed to encourage taxpayers to obtain additional education.
D)Allowance of a deduction for state and local income taxes paid.
E)None of the above.
Answer: C
Q2) The tax law provides various tax credits, deductions, and exclusions that are designed to encourage taxpayers to obtain additional education.These provisions can be justified on both economic and social grounds.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Working With the Tax Law
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Q1) Federal tax legislation generally originates in the Senate Finance Committee.
A)True
B)False
Answer: False
Q2) Which publisher offers the United States Tax Reporter?
A)Research Institute of America.
B)Commerce Clearing House.
C)LexisNexis.
D)Tax Analysts.
E)None of the above.
Answer: A
Q3) Section 1244 permits an investor to convert what would be a capital loss into an ordinary loss.
A)True
B)False
Answer: True
Q4) The Golsen rule has been overturned by the U.S.Supreme Court.
A)True
B)False
Answer: False
Page 4
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Chapter 3: Computing the Tax
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Q1) After Carolyn moves out of the apartment she had rented as her personal residence, she recovers her damage deposit of $500.The $500 is income to Carolyn.
A)True
B)False
Answer: False
Q2) The Martins have a teenage son who has become an accomplished bagpiper.With proper promotion and scheduling, the son has good income potential by charging for his services at special events (particularly funerals).However, the Martins are fearful that the income could generate a kiddie tax and cause them the loss of a dependency exemption deduction.Are the Martins' concerns justified? Explain. Answer: The income received by the son would be earned income.Therefore, the kiddie tax is not a problem since it applies only to unearned income.As long as the son is under age 19 (or a full-time student under age 24), he is a dependent as a qualifying child.Under these rules, the amount of the son's income does not matter (unless he becomes self-supporting).If the son is age 19 (or older) and not a student, any dependency exemption must satisfy the qualifying relative rules.Here, not meeting the gross income test would cause the dependency exemption to be lost.
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Page 5
Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Rachel owns rental properties.When Rachel rents to a new tenant, she usually requires the tenant to pay an amount in addition to the first month's rent.The additional amount serves as security for damages to the property and the tenant's failure to pay future rents.How should the payments be characterized (e.g., on lease documents) to minimize Rachel's current tax liability?
Q2) The realization requirement gives an incentive to own assets that have increased in value and to sell assets whose value has decreased. A)True B)False
Q3) Arnold was employed during the first six months of the year and earned a $86,000 salary.During the next 6 months, he collected $4,800 of unemployment compensation, borrowed $6,000 (using his personal residence as collateral), and withdrew $1,000 from his savings account (including $60, interest).His luck was not all bad, for in December he won $800 in the lottery on a $20 ticket.Because of his dire circumstances, Arnold's parents loaned him $10,000 (interest-free) on July 1 of the current year, when the Federal rate was 8%.Arnold did not repay the loan during the year and used the money for living expenses.Calculate Arnold's adjusted gross income for the year.
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Chapter 5: Gross Income: Exclusions
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Q1) A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for:
A)Only tuition.
B)Tuition, books, and supplies.
C)Tuition, books, supplies, meals, and lodging.
D)Meals and lodging.
E)None of the above.
Q2) Jack received a court award in a civil libel and slander suit against National Gossip.He received $120,000 for damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive damages.Jack must include in his gross income as a damage award:
A)$0.
B)$100,000.
C)$120,000.
D)$270,000.
E)None of the above.
Q3) What are the tax problems associated with payments received by a wife from her deceased husband's employer? (Assume the wife renders no services to the employer.)
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Chapter 6: Deductions and Losses: in General
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Q1) In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of the stock on the date of sale.Five months later, James sold the same stock through his broker for $27,000.What is the tax effect of these transactions?
A)Disallowed loss to James of $2,000; gain to Lance of $1,000.
B)Disallowed loss to Lance of $2,000; gain to James of $3,000.
C)Deductible loss to Lance of $2,000; gain to James of $3,000.
D)Disallowed loss to Lance of $2,000; gain to James of $1,000.
E)None of the above.
Q2) Kitty runs a brothel (illegal under state law) and has the following items of income and expense.What is the amount that she must include in taxable income from her operation?
Q3) During the year, Jim rented his vacation home for 200 days and lived in it for 19 days. During the remaining days, the vacation home was available for rental use. Is the vacation home subject to the limitation on the deductions of a personal/rental vacation home?
Q4) Two-thirds of treble damage payments under the antitrust law are deductible.
A)True
B)False
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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Q1) The amount of a farming loss cannot exceed the amount of the taxpayer's NOL for the taxable year.
A)True
B)False
Q2) Taxpayers must sell or exchange their § 1244 stock in order to recognize an ordinary loss (does not apply to stock becoming worthless).
A)True
B)False
Q3) An individual may deduct a loss on rental property even if it does not meet the definition of a casualty loss.
A)True
B)False
Q4) If an account receivable written off during the current year is subsequently collected during the current year, the write-off entry is reversed.
A)True
B)False
Q5) Discuss the effect of alimony in computing a net operating loss.
Page 9
Q6) 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) In a farming business, MACRS straight-line cost recovery is required for all fruit bearing trees.
A)True
B)False
Q2) Property used for the production of income is not eligible for § 179 expensing.
A)True
B)False
Q3) All eligible real estate under MACRS is permitted one-half month of cost recovery in the month of disposition.
A)True
B)False
Q4) Which of the following assets would be subject to cost recovery?
A)A painting by Picasso hanging on a doctor's office wall.
B)An antique vase in a doctor's waiting room.
C)Stock in the doctor's LLC.
D)a., b., and c.
E)None of the above.
Q5) Discuss the beneficial tax consequences of an SUV not being classified as a passenger automobile.
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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Q1) Frank, a recently retired FBI agent, pays job search expenses to obtain a position with a city police department.Frank's job search expenses do not qualify as deductions.
A)True
B)False
Q2) Tired of her 60 mile daily commute, Margaret purchases a condo that is only five miles from her job.Margaret's moving expenses to her new condo are allowed and can be claimed by her as a deduction.
A)True
B)False
Q3) After she finishes working at her main job, Ann returns home, has dinner, then drives to her second job.Ann may deduct the mileage between her home and second job.
A)True
B)False
Q4) One indicia of independent contractor (rather than employee) status is when the individual performing the services is paid based on time spent (rather than on tasks performed).
A)True
B)False
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) Fees for automobile inspections, automobile titles and registration, bridge and highway tolls, parking meter deposits, and postage are not deductible if incurred for personal reasons, but they are deductible as deductions for AGI if incurred as a business expense by a self-employed taxpayer.
A)True
B)False
Q2) In 2012, Shirley sold her personal residence to Mike for $400,000.Before the sale, Shirley paid the real estate taxes of $7,030 for the calendar year.For income tax purposes, the deduction is apportioned as follows: $4,000 to Shirley and $3,030 to Mike.
a. What is Mike's basis in the residence?
b. What is Shirley's amount realized from the sale of the residence?
c. What amount of real estate taxes can Mike deduct?
d. What amount of real estate taxes can Shirley deduct?
Q3) In order to dissuade his pastor from resigning and taking a position with a larger church, Michael, an ardent leader of the congregation, gives the pastor a new car. The cost of the car is deductible by Michael as a charitable contribution.
A)True
B)False
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Chapter 11: Investor Losses
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Q1) Linda owns investments that produce portfolio income and Activity A that produces losses.From a tax perspective, Linda will be better off if Activity A is not passive.
A)True
B)False
Q2) Seth had interest income of $31,000, investment expenses of $28,000, and a long-term capital gain of $8,000 on an investment. In calculating his net investment income, Seth may deduct a maximum of $11,000 investment interest.
A)True
B)False
Q3) Orange Corporation, a closely held (non-personal service) C corporation, earns active income of $300,000 in the current year.The corporation also receives $35,000 in dividends and incurs a loss of $50,000 from an investment in a passive activity.What is Orange's income for the year after considering the passive investment?
Q4) Describe the general rules that limit the deduction of investment interest expense.
Q5) Identify how the passive loss rules broadly classify various types of income and losses.Provide examples of each category.
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Page 14
Chapter 12: Tax Credits and Payments
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Q1) Nonrefundable credits are those that reduce the taxpayer's tax liability but are not paid when the amount of the credit (or credits) exceeds the taxpayer's tax liability.
A)True
B)False
Q2) Child and dependent care expenses do not include amounts paid for general household services.
A)True B)False
Q3) The tax benefits resulting from tax credits and tax deductions are never affected by the tax rate bracket of the taxpayer.
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
Q5) Explain the purpose of the disabled access credit and describe the general characteristics of its computation.
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Chapter 13: Property Transactions: Determination of Gain or
Loss, Basis Considerations, and Nontaxable
Exchanges-Part 1
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Q1) Which of the following types of transactions qualify for nonrecognition treatment?
A)Exchange by a shareholder of stock in Chevron for stock in Shell.
B)Investment of the proceeds from the sale of the stock of a publicly traded company in the common stock of a specialized small business investment company (SSBIC) within 60 days of the sale.
C)Investment of proceeds from the sale of qualified small business stock in another qualified small business stock within 60 days of the sale.
D)Only b.and c.
E)a., b., and c.
Q2) In a nontaxable exchange, recognition is postponed.In a tax-free transaction, nonrecognition is permanent.
A)True
B)False
Q3) 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.
A)True
B)False
Page 16
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Chapter 13: Property Transactions: Determination of Gain or
Loss, Basis Considerations, and Nontaxable
Exchanges-Part 2
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Q1) Butch sells land with an adjusted basis of $88,000 and a fair market value of $160,000 to Cynthia, his wife, for $160,000.Discuss how the tax consequences would differ if Butch and Cynthia had never been married.
Q2) Why is it generally undesirable to pass property by death when its fair market value is less than basis?
Q3) Boyd acquired tax-exempt bonds for $430,000 in December 2012.The bonds, which mature in December 2017, have a maturity value of $400,000.Boyd does not make any elections regarding the amortization of the bond premium.Determine the tax consequences to Boyd when he redeems the bonds in December 2017.
Q4) Larry, who lived in Maine, acquired a personal residence eight years ago when he was 42 years old.During this period he has occupied the residence for only nine months (out of 12) each year due to winter vacations in Florida.Is Larry eligible for exclusion of gain under § 121?
Q5) Discuss the relationship between the postponement of realized gain under § 1031 (like-kind exchanges) and the adjusted basis and holding period for the replacement property.
Page 17
Q6) When a property transaction occurs, what four questions should be considered with respect to the sale or other disposition?
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Chapter 14: Property Transactions: Capital Gains and
Losses, 1231, Recapture Provisions
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Q1) Recognized gains and losses must be properly classified. Proper classification depends upon:
A)The tax status of the property.
B)The manner of the property's disposition.
C)The holding period of the property.
D)a., b., and c.
E)None of the above.
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) If there is a net § 1231 loss, it is treated as a long-term capital loss.
A)True
B)False
Q4) In the "General Procedure for § 1231 Computation: Step 2.§ 1231 Netting," if the gains exceed the losses, the net gain is offset by the "lookback" nonrecaptured § 1231 losses.
A)True
B)False
Page 19
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Chapter 15: Alternative Minimum Tax
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Q1) The net capital gain included in an individual taxpayer's AMT base is eligible for the alternative tax rate on net capital gain. This favorable alternative rate applies both in calculating the regular income tax and the AMT.
A)True
B)False
Q2) In 2012, Sean incurs $90,000 of mining exploration expenditures, and deducts the entire amount for regular income tax purposes.Which of the following statements is correct?
A)For AMT purposes, Sean will have a positive adjustment of $81,000 in 2012.
B)Sean will have a negative AMT adjustment of $9,000 in 2017.
C)Over a 10-year period, positive and negative adjustments will net to zero.
D)Only a.and c.are correct.
E)a., b., and c.are correct.
Q3) Tammy expensed mining exploration and development costs of $100,000 incurred in 2012.She will be required to make negative AMT adjustments for each of the next nine years and a positive AMT adjustment in the current tax year.
A)True
B)False
Q4) Under what circumstances are corporations exempt from the AMT?
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Chapter 16: Accounting Periods and Methods
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Q1) 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.R & G Partnership must use September 30th as its tax year, unless it has a business purpose for using a different tax year.
A)True
B)False
Q2) Laura Corporation changed its tax year-end from July 31st to December 31st in 2012.The income for the period August 1, 2012 through December 31, 2012 was $35,000. The corporate tax rate is 15% on the first $50,000 of income, 25% on income from $50,001 to $75,000, and 34% on income from $75,001 to $100,000. A portion of Laura's JuneDecember 2012 income will be taxed at 34%.
A)True
B)False
Q3) Which of the following statements regarding a 52-53 week tax year is correct?
A)The year-end must be the same day of the week in all years.
B)The year cannot contain more than 366 calendar days.
C)Every four years, there will be only 51 weeks.
D)The year cannot end on a Sunday.
E)None of the above.
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Page 21
Chapter 17: Corporations: Introduction and Operating Rules
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Q1) Beige Corporation, a C corporation, purchases a warehouse on August 1, 1996, for $1 million. Straight-line depreciation is taken in the amount of $411,750 before the property is sold on June 11, 2012, for $1.2 million. What is the amount and character of the gain recognized by Beige on the sale of the realty?
A)Ordinary income of $0 and § 1231 gain of $611,750.
B)Ordinary income of $411,750 and § 1231 gain of $200,000.
C)Ordinary income of $82,350 and § 1231 gain of $529,400.
D)Ordinary income of $117,650 and § 1231 gain of $494,100.
E)None of the above.
Q2) On December 31, 2012, Peregrine Corporation, an accrual method, calendar year taxpayer, accrued a performance bonus of $100,000 to Charles, a cash basis, calendar year taxpayer. Charles is president and sole shareholder of the corporation. When can Peregrine deduct the bonus?
A)In 2012, if the bonus was authorized by the Board of Directors and payment was made on or before March 15, 2013.
B)In 2013, if payment was made at any time during that year.
C)In 2012, if payment was made on or before March 15, 2013.
D)In 2013, but only if payment was made on or before March 15, 2013.
E)None of the above.
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Page 22
Chapter 18: Corporations: Organization and Capital Structure
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Q1) If a shareholder owns stock received as a gift from her mother, it cannot be § 1244 stock.
A)True
B)False
Q2) Adam transfers cash of $300,000 and land worth $200,000 to Camel Corporation for 100% of the stock in Camel.In the first year of operation, Camel has net taxable income of $70,000.If Camel distributes $50,000 to Adam:
A)Adam has taxable income of $50,000.
B)Camel Corporation has a tax deduction of $50,000.
C)Adam has no taxable income from the distribution.
D)Camel Corporation reduces its basis in the land to $150,000.
E)None of the above.
Q3) Isabella and Marta form Pine Corporation. Isabella transfers land (basis of $40,000 and fair market value of $180,000) for 50 shares plus $20,000 cash, while Marta transfers $160,000 cash for the other 50 shares in Pine Corporation. Pine Corporation has a basis of $40,000 in the land it receives from Isabella.
A)True B)False
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Chapter 19: Corporations: Distributions Not in Complete
Liquidation
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Q1) Explain the requirements for waiving the family attribution rules in the case of complete termination redemptions.
Q2) Under certain circumstances, a distribution can generate (or add to) a deficit in E & P.
A)True
B)False
Q3) Sally and her mother are the sole shareholders of Owl Corporation. During the current year, Owl distributes cash in redemption of all of Sally's stock. Sally continues to be employed as controller for Owl after the redemption. The distribution is a complete termination redemption resulting in sale or exchange treatment for Sally.
A)True
B)False
Q4) How does the payment of a property dividend affect E & P?
Q5) Use of MACRS cost recovery when computing taxable income does not require an E & P adjustment.
A)True B)False
Q6) Explain the stock attribution rules that apply in the case of stock redemptions.
Page 24
Q7) When is a redemption to pay death taxes under § 303 most advantageous?
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) Corporate reorganizations can meet the requirements to qualify as like-kind exchanges if there is no boot involved.
A)True
B)False
Q2) Explain whether shareholders are exempted from gain/loss recognition in nontaxable corporate reorganization or the gain/loss recognition is merely postponed.If postponed, what is the vehicle for ensuring the postponed gain/loss will be recognized in the future?
Q3) Since debt security holders do not own stock, they do not fall under the corporate reorganization rules.
A)True
B)False
Q4) As a general rule, a liquidating corporation recognizes gains but not losses on the distribution of property in complete liquidation.
A)True
B)False
Q5) Discuss the role of letter rulings in corporate reorganizations.
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Q6) Compare the sale of a corporation's assets with a sale of its stock from the perspective of the seller.
Chapter 21: Partnerships
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Q1) Which of the following statements, if any, about an LLC is false?
A)An LLC is usually taxed like a partnership.
B)"Members" of an LLC generally have limited personal liability for debts of the LLC, except for the managing member who has unlimited liability for LLC debts.
C)"Members" of an LLC can participate in management of the LLC unless the member agrees not to participate.
D)An LLC can specially allocate income items, as long as the substantial economic effect rules of § 704(b) are followed.
E)None of the above statements is false.
Q2) A limited liability company generally provides limited liability for those owners that are not active in the management of the LLC but requires owner-managers of the LLC to have unlimited personal liability for LLC debts.
A)True
B)False
Q3) The taxable income of a partnership flows through to the partners, who report the income on their tax returns.
A)True
B)False
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Chapter 22: S: Corporations
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Q1) Consent to an S election must be in ____________________, and it must be generally filed by the election ____________________. or
Q2) If a resident alien shareholder moves outside the U.S., the S election is terminated.
A)True
B)False
Q3) Tax-exempt income is listed on Schedule ____________________ of Form 1120S.
Q4) Discuss the two methods of allocating tax-related items to S corporation shareholders.
Q5) For Federal income tax purposes, taxation of S corporations resembles that of partnerships.
A)True
B)False
Q6) A qualifying S election requires the consent of ____________________ of the corporate shareholders. or
Q7) To make a valid S election, the entity must file a properly completed Form
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Chapter 23: Exempt Entities
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Q1) An exempt organization that is eligible to elect under § 501(h) to engage in lobbying activities on a limited basis incurs no tax liability from lobbying, if the lobbying expenditures for the tax year do not exceed the lobbying expenditures ceiling.
A)True
B)False
Q2) Even though a church is exempt under § 501(c)(3), it is required to obtain IRS approval for its exempt status.
A)True
B)False
Q3) All exempt organizations which are subject to the unrelated business income tax must file Form 990-T (Exempt Organization Business Income Tax Return).
A)True
B)False
Q4) Warmth, Inc., a private foundation, makes an expenditure of $800,000 that should not be made by a private foundation.Calculate the tax on taxable expenditures.Assume that corrective action is taken so that the additional tax does not apply.
Q5) What income and activities are not subject to the feeder organization rules?
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Chapter 24: Multistate Corporate Taxation
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Q1) The throwback rule requires that:
A)Sales of tangible personal property are attributed to the state where they originated, if the taxpayer is not taxable in the state of destination.
B)Sales of tangible personal property are attributed to the seller's state, even if the taxpayer is not taxable in the state of destination.
C)Sales of services are attributed to the state of commercial domicile.
D)Capital gain/loss is attributed to the state of commercial domicile.
Q2) In computing the property factor, property owned by the corporation typically is valued at its ____________________, but without adjusting for depreciation. or
Q3) A state sales tax usually falls upon:
A)Sales of groceries.
B)Sales of widgets made to out-of-state customers.
C)Sales of widgets made to the ultimate consumer of the product or service.
D)Sales of real estate.
Q4) Most states waive the collection of sales tax on medical equipment.
A)True
B)False
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Chapter 25: Taxation of International Transactions
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148 Verified Questions
148 Flashcards
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Sample Questions
Q1) Krebs, Inc., a U.S.corporation, operates an unincorporated branch manufacturing operation in the U.K.Krebs, Inc., reports $900,000 of taxable income from the U.K.branch on its U.S.tax return, along with $1,600,000 of taxable income from its U.S.operations.The U.K.branch income is all general limitation basket income.Krebs paid $270,000 in U.K.income taxes related to the $900,000 in branch income. Assuming a U.S.tax rate of 35%, what is Krebs' U.S.tax liability after any allowable foreign tax credits?
A)$0.
B)$270,000.
C)$605,000.
D)$875,000.
Q2) Collins, Inc.received gross foreign-source dividend income of $250,000.Foreign taxes withheld on the dividend were $25,000 and no § 902 credit is available.Its worldwide taxable income for the tax year is $500,000.U.S.tax before the FTC is $175,000.Collins' current year FTC is $87,500.
A)True
B)False
Q3) Losses and deductions, similar to income items, can be U.S.- or foreign-source.
A)True
B)False
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Page 30
Chapter 26: Tax Practice and Ethics
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147 Verified Questions
147 Flashcards
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Sample Questions
Q1) CPA Jennifer has heard about the AICPA's Statements on Standards for Tax Services. Although Jennifer is a licensed CPA in her state, she is not a member of the AICPA. How do the Statements affect Jennifer's tax practice?
Q2) Minnie, a calendar year taxpayer, filed a return correctly showing a zero Federal income tax liability for 2011, because her Form 1040 showed various deductions and credits.During 2012, Minnie's AGI is $120,000 and her tax liability is $20,000.To avoid a penalty for 2012, Minnie must make aggregate estimated tax payments of at least:
A)$20,000.
B)$18,000.
C)$1,000 (minimum amount).
D)$0.
Q3) Certain individuals are more likely than others to have the Form 1040 audited by the IRS. List at least five factors that may increase above the national norms one's chances of audit.
Q4) A negligence penalty is assessed when the taxpayer is found to have not made a reasonable attempt to apply with the tax law.
A)True
B)False
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Page 31
Chapter 28: Income Taxation of Trusts and Estates
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145 Verified Questions
145 Flashcards
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Sample Questions
Q1) The tax rules regarding the income taxation of trusts and estates are included in which Subchapter of the Internal Revenue Code?
A)S.
B)K.
C)J.
D)C.
Q2) The Rodriguez Trust generated $300,000 in alternative minimum taxable income (AMTI) this year.The trust is subject to a marginal Federal income tax rate of: A)26%.
B)28%.
C)33%.
D)35%.
Q3) The depreciation deductions of a trust usually are allocable to ____________________ beneficiaries. or
Q4) When the Holloway Trust terminated this year, it held a $1 million NOL carryforward. How is the loss carryforward treated? Does it expire with the trust or can another taxpayer use it? Be specific.
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