Individual Taxation Final Exam
Course Introduction
This course provides an in-depth exploration of federal income taxation as it applies to individual taxpayers. Students will examine the principles and regulations underlying the U.S. tax system, focusing on the determination of gross income, exclusions, deductions, credits, and the computation of taxable income. The course also addresses issues such as filing status, personal and dependent exemptions, tax planning strategies, and the ethical responsibilities of tax preparers. Throughout the course, case studies and practical exercises are used to reinforce tax concepts and their application to real-world scenarios.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 2013 16th Edition by Sally Jones
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18 Chapters
1732 Verified Questions
1732 Flashcards
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Chapter 1: Taxes and Taxing Jurisdictions
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85 Verified Questions
85 Flashcards
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Sample Questions
Q1) Ms. Penser resides in the city of Lanock, Tennessee. She owns 100% of the stock of PSW Inc., which is incorporated under Tennessee law and conducts business in six different local jurisdictions in Tennessee.
A. How many taxpayers are identified in the above statement of facts?
A. Ms. Penser is an individual taxpayer, and PSW Inc. is a corporate taxpayer. The city of Lanock, the state of Tennessee, and the United States have jurisdiction to tax Ms. Penser.
B. Identify the governments with jurisdiction to tax each of these taxpayers.
B. The six local jurisdictions, the state of Tennessee, and the United States have jurisdiction to tax PSW Inc.
Answer: A. Ms. Penser is an individual taxpayer, and PSW Inc. is a corporate taxpayer. The city of Lanock, the state of Tennessee, and the United States have jurisdiction to tax Ms. Penser.
B. The six local jurisdictions, the state of Tennessee, and the United States have jurisdiction to tax PSW Inc.
Q2) A user fee entitles the payer to a specific good or service from the government.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) A static forecast of the incremental revenue from a tax rate increase presumes that:
A) The tax base will not change because of the rate increase.
B) The tax base will increase by the same proportion as the rate increase.
C) The tax base will decrease by the same proportion as the rate increase.
D) The tax rate and the tax base are correlated.
Answer: A
Q2) Jurisdiction F levies a 10% excise tax on the purchase of golf carts. The annual revenue from this tax averages $800,000 (10% * $8 million average annual golf cart purchases). Jurisdiction F is considering raising the tax rate to 12%. Which of the following statements is true?
A) The rate increase will increase revenue by $160,000.
B) Based on a dynamic forecast, the rate increase will increase revenue by $160,000.
C) Based on a static forecast, the rate increase will increase revenue by $160,000.
D) None of the above is true.
Answer: C
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4
Chapter 3: Taxes As Transaction Costs
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Sample Questions
Q1) When the IRS audits a tax return, it is most likely to scrutinize the tax consequences of a/an:
A) Related party transaction
B) Private market transaction
C) Public market transaction
D) Arm's length transaction
Answer: A
Q2) Late in the current year, Jolsen Company signed a four-year contract with an advertising agency. Under the contract, Jolsen must pay $375,000 annually for the agency's services. After Jolsen signed the contract, Congress enacted legislation disallowing any deduction for advertising expense for future tax years. Jolsen underestimated the after-tax cost of the contract because of:
A) Marginal tax rate uncertainty
B) Financial risk
C) Audit risk
D) Tax law uncertainty
Answer: D
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Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) Mr. Coomb structured a transfer of real estate to his daughter as a sale. Upon audit, the IRS agent analyzed the economic consequences of the transfer and treated it as a gift by applying the:
A) Business purpose doctrine
B) Substance over form doctrine
C) Assignment of income doctrine
D) Step transaction doctrine
Q2) In 20Y1, Ms. Graves transferred appreciated property to KL Partnership in exchange for an ownership interest in the partnership. She deliberated waited until 20Y3 before taking cash out of the partnership. Ms. Graves may have been trying to prevent the IRS from applying the:
A) Business purpose doctrine
B) Economic substance doctrine
C) Substance over form doctrine
D) Step transaction doctrine
Q3) The goal of tax planning is to reduce tax costs or increase tax savings as much as possible.
A)True
B)False
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Page 6
Chapter 5: Tax Research
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75 Flashcards
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Sample Questions
Q1) Tax research typically occurs as part of the tax compliance process; it is rarely important in tax planning.
A)True
B)False
Q2) When analyzing tax authorities, the researcher must decide if the authority requires a factual judgment or an evaluative judgment. The difference between the two can be described as follows:
A) In making an evaluative judgment, the researcher can provide a definitive answer to the research question.
B) In making a factual judgment, the authority may be subject to interpretation.
C) In making an evaluative judgment, the researcher must draw a subjective conclusion that results in a qualified answer.
D) There is little difference between a factual judgment and an evaluative judgment.
Q3) A taxpayer who loses a case in the U.S. Tax Court may appeal the case directly to the U.S. Supreme Court.
A)True
B)False
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Chapter 6: Taxable Income From Business Operations
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116 Verified Questions
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Sample Questions
Q1) Jethro Company, an accrual basis taxpayer, had a $10,000 overdue account payable to a major supplier. The supplier agreed to settle the account for $9,000 cash from Jethro. Which of the following statements is true?
A) Jethro recognizes $1,000 income because of the settlement. B) Jethro recognizes no income because of the settlement.
C) Jethro can deduct the $9,000 payment.
D) Jethro can deduct a $1,000 bad debt expense.
Q2) Which of the following statements about the cash method of accounting is false?
A) Under the cash method, annual taxable income equals annual net cash inflow.
B) The revenue from a sale of goods is recognized when payment is received.
C) An expense is recognized when the expense is paid.
D) None of the above is false.
Q3) The principle of conservatism reflected by GAAP is identical to the principle of conservatism reflected in the tax law.
A)True
B)False
Q4) Federal and state political lobbying expenses are nondeductible.
A)True
B)False
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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106 Verified Questions
106 Flashcards
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Sample Questions
Q1) Which of the following statements about tax basis is false?
A) The tax basis in an asset can never be negative.
B) Tax basis represents the taxpayer's unrecovered dollars invested in the asset.
C) Tax basis reflects the asset's fair market value.
D) Every asset owned by the taxpayer has a tax basis.
Q2) Which of the following statements about amortization deductions is false?
A) Amortization deductions result in the recovery of the capitalized cost of an intangible asset.
B) Amortization is computed ratably (on a straight-line basis) over the asset's determinable life.
C) Amortization deductions reduce the tax basis of the amortized asset.
D) None of the above is false.
Q3) A firm can use LIFO for computing cost of goods sold for tax purposes only if it uses LIFO for financial reporting purposes.
A)True
B)False
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Chapter 8: Property Dispositions
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Sample Questions
Q1) Mrs. Tinker paid $78,400 to purchase 15,000 shares of HiFli common stock in 2004. This year, HiFli declared bankruptcy and announced that its stock has no value. What is the tax consequence to Mrs. Tinker of this bad news?
A) $78,400 ordinary abandonment loss
B) $78,400 capital loss
C) No loss recognition until Mrs. Tinker actually disposes of the stock
D) None of the above
Q2) A casualty loss realized on the destruction of depreciable business property is characterized as a Section 1231 loss.
A)True
B)False
Q3) This year, Izard Company sold equipment purchased in 2008 at a cost of $48,500. Accumulated depreciation through date of sale was $18,900. Which of the following statements is false?
A) If the sale price was $25,000, Izard recognized $4,600 Section 1231 loss.
B) If the sale price was $42,500, Izard recognized $18,900 Section 1231 gain.
C) If the sale price was $50,000, Izard recognized $18,900 ordinary gain and $1,500 Section 1231 gain.
D) None of the above is false.
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Page 10
Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) V&P Company exchanged unencumbered investment land for farmland subject to a $200,000 mortgage. If V&P realized a $168,000 gain on the exchange, it must recognize the entire gain.
A)True
B)False
Q2) Berly Company transferred an old asset with a $12,300 adjusted tax basis in exchange for a new asset worth $20,000. Which of the following statements is false?
A) The old asset's FMV is $20,000.
B) If the exchange is nontaxable, Berly's tax basis in the new asset is $12,300.
C) If the exchange is taxable, Berly's recognized gain is $7,700.
D) None of the statements is false.
Q3) A taxpayer who realizes a loss on the exchange of like-kind property can elect to recognize the loss.
A)True
B)False
Q4) Tax neutrality for asset exchanges is the exception rather than the rule.
A)True
B)False
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Page 11
Chapter 10: Sole Proprietorships, Partnerships, Llcs, and S Corporations
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Sample Questions
Q1) The shareholders of an S corporation must pay self-employment tax on their share of the corporation's ordinary income.
A)True
B)False
Q2) Sue's 2012 net (take-home) pay was $23,805. Her only payroll deductions were for payroll taxes and federal income tax. Federal income tax withholdings totaled $4,500. What was the amount of her gross wages for the year?
A) $25,736
B) $30,000
C) $29,536
D) None of the above
Q3) Mr. Dilly has expenses relating to a qualifying home office of $14,320. The taxable income generated by the business before any deduction of home office expenses was $13,700. His allowable home office deduction is $14,320.
A)True
B)False
Q4) The earnings of a C corporation are taxed only at the shareholder level.
A)True
B)False
Page 12
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Chapter 11: The Corporate Taxpayer
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Sample
Questions
Q1) Aaron, Inc. is a nonprofit corporation that collects and distributes food for needy families. Aaron, Inc. also operates a small grocery store for profit. Which of the following statements is true?
A) The income from the collection and distribution of food and the income from grocery store are taxable.
B) No income from either of the activities is taxable.
C) Only the income from the collection and distribution of food is taxable.
D) Only the income from the grocery store is taxable.
Q2) TasteCo, Inc. reported $210,500 of taxable income this year. What is its regular tax liability?
A) $82,095
B) $65,345
C) $73,675
D) $71,570
Q3) The purpose of Schedule M-1 is to explain the differences between financial statement income and taxable income.
A)True
B)False
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13
Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) When a closely held business is formed as a regular corporation, earnings that are distributed to a shareholder-employee as dividends are taxed only once.
A)True
B)False
Q2) Which of the following would not be a successful means of avoiding double tax on the earnings of a closely-held corporation?
A) Having a shareholder lend money to the corporation at a reasonable rate of interest. B) Having a shareholder lease warehouse space to the corporation at a reasonable rental rate.
C) Having the corporation pay the shareholder a fixed percentage of the par value of the stock the shareholder owns.
D) Having the corporation employ the shareholder at a reasonable compensation.
Q3) Owners of a small business typically minimize tax costs and maximize cash flow by operating as a passthrough entity.
A)True
B)False
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Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) Orchid Inc., a U.S. multinational with a 34% marginal tax rate, owns a foreign subsidiary operating in a country with a 25% income tax. This year, the subsidiary generated $400,000 taxable income. What is the total tax burden (domestic and foreign) on the earnings of the foreign subsidiary if it does not repatriate its after-tax earnings and has no subpart F income?
A) $163,000
B) $136,000
C) $400,000
D) $100,000
Q2) Article 1 of the U.S. Constitution, referred to as the commerce clause, prohibits state governments from using a tax to discriminate against interstate commerce.
A)True
B)False
Q3) GAAP-based consolidated financial statements include only income earned by the consolidated group's domestic subsidiaries.
A)True
B)False
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Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Mr. and Mrs. David file a joint tax return. They have $169,300 taxable income in 2012, $120,300 of which is ordinary income and $49,000 of which is taxed at a 15% preferential rate. Compute their tax savings from the preferential rate.
A) $6,370
B) $5,698
C) $4,900
D) None of the above.
Q2) A taxpayer who knowingly signs a joint return on which his spouse has failed to report her income is liable for any tax assessments made by the IRS on that income.
A)True
B)False
Q3) Every individual taxpayer is entitled to an AMT exemption, the amount of which varies with filing status.
A)True
B)False
Q4) Adjusted gross income equals total income less itemized deductions.
A)True
B)False
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Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) Unreimbursed moving expenses are a miscellaneous itemized deduction.
A)True
B)False
Q2) Which of the following statements regarding employee versus independent contractor status is false?
A) The determination as to whether a worker is an employee or an independent contractor is based on a subjective set of guidelines.
B) An employer has a financial incentive to classify a worker as an independent contractor instead of an employee.
C) The IRS has a higher probability of collecting income and payroll taxes from an independent contractor than from an employee.
D) If the IRS reclassifies a worker from independent contractor to employee, the employer can become liable for the employee's share of unpaid payroll taxes.
Q3) Traditional IRAs but not Roth IRAs are subject to a minimum distribution requirement when the owner reaches age 70½.
A)True
B)False
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Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) The cash surrender value of a life insurance policy is taxable to the policy beneficiary upon the death of the insured individual.
A)True
B)False
Q2) Qualified dividend income earned by an individual taxpayer is taxed at a maximum rate of 15%.
A)True B)False
Q3) Investment interest expense is a miscellaneous itemized deduction subject to the 2% AGI limitation.
A)True
B)False
Q4) The tax consequences of a business activity are generally the same as the tax consequences of an investment activity.
A)True B)False
Q5) Gift tax is based on the donor's adjusted tax basis in the transferred property. A)True B)False
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Chapter 17: Tax Consequences of Personal Activities
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Sample Questions
Q1) Jenna Leigh is employed as a receptionist for a CPA firm, but on evenings and weekends, she bakes wedding cakes. In each of the past four years, Jenna's baking activity resulted in a net profit. This year, the activity generated a $720 net loss. Which of the following statements is true?
A) The legal presumption is that Jenna's $720 loss is a business loss.
B) The legal presumption is that Jenna's $720 loss is a nondeductible hobby loss.
C) Jenna must include the revenues from her baking activity in gross income but can't deduct any of her related expenses.
D) Jenna is allowed to report her $720 loss as a miscellaneous itemized deduction.
Q2) For federal income tax purposes, property transfers pursuant to a divorce are nontaxable events.
A)True
B)False
Q3) Taxpayers include a maximum of 85% of Social Security benefits in gross income.
A)True
B)False
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Page 19
Chapter 18: The Tax Compliance Process
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Sample Questions
Q1) Only one spouse must sign a jointly filed Form 1040.
A)True
B)False
Q2) A special agent is assigned to a tax investigation to determine if the government has enough evidence to indict the taxpayer for criminal fraud.
A)True
B)False
Q3) Mr. and Mrs. Pitt filed a joint tax return in 2010. The couple divorced in 2011. The IRS audited their 2010 return and determined that the Pitts had underpaid their tax by $38,200. Which of the following statements is true?
A) The IRS can assess either Mr. Pitt or Mrs. Pitt for the entire deficiency.
B) Because the couple is divorced, the IRS must assess Mr. Pitt with a $19,100 deficiency and Mrs. Pitt with a $19,100 deficiency.
C) Because the couple is divorced, the IRS must apportion the deficiency between Mr. and Mrs. Pitt based on their relative contribution to taxable income.
D) The IRS must assess whichever spouse actually prepared the return for the entire deficiency.
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