Individual Taxation Review Questions
Course Introduction
This course provides a comprehensive overview of the U.S. federal income tax system as it applies to individual taxpayers. Topics include the determination of gross income, deductions, tax credits, filing status, exemptions, and calculation of tax liability. Students will examine tax compliance and planning strategies, relevant Internal Revenue Code sections, and the ethical responsibilities of tax practitioners. The course also explores recent tax law changes and their impact on individuals, emphasizing practical application through case studies and tax return preparation exercises.
Recommended Textbook
South Western Federal Taxation 2013 Individual Income Taxes 36th Edition by William H
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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) In 1985,Roy leased real estate to Drab Corporation for 20 years.Drab Corporation made significant capital improvements to the property.In 2005,Roy decides not to renew the lease and vacates the property.At that time,the value of the improvements is $800,000.Roy sells the real estate in 2012 for $1,200,000 of which $900,000 is attributable to the improvements.How and when is Roy taxed on the improvements made by Drab Corporation?
Answer: Roy is not subject to taxation on the improvements until he disposes of the property .After a controversial Supreme Court decision years ago,Congress clarified the tax law to make it more consistent with the wherewithal to pay concept.
Q2) A VAT (value added tax):
A) Is regressive in its effect.
B) Has not proved popular outside of the U.S.
C) Is not a tax on consumption.
D) Is used exclusively by third world (less developed) countries.
E) None of the above.
Answer: A
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Chapter 2: Working With the Tax Law
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Sample Questions
Q1) Federal tax legislation generally originates in the Senate Finance Committee.
A)True
B)False
Answer: False
Q2) The IRS issues an acquiescence or nonacquiescence only for regular Tax Court decisions.
A)True
B)False
Answer: False
Q3) What is a Technical Advice Memorandum?
Answer: The National Office of the IRS releases Technical Advice Memoranda (TAMs)weekly.TAMs resemble letter rulings in that they give the IRS's determination of an issue.However,they differ in several respects.Letter rulings deal with proposed transactions and are issued to taxpayers at their request.In contrast,TAMs deal with completed transactions.Furthermore,TAMs arise from questions raised by IRS personnel during audits and are issued by the National Office of the IRS to its field personnel.TAMs are often requested for questions relating to exempt organizations and employee plans.TAMs are not officially published and may not be cited or used as precedent.
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Chapter 3: Tax Formula and Tax Determination: an
Overview of Property Transactions
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Sample Questions
Q1) Surviving spouse filing status begins in the year in which the deceased spouse died.
A)True
B)False
Answer: False
Q2) Kyle,whose wife died in December 2009,filed a joint tax return for 2009.He did not remarry,but has continued to maintain his home in which his two dependent children live.What is Kyle's filing status as to 2012?
A) Head of household.
B) Surviving spouse.
C) Single.
D) Married filing separately.
E) None of the above.
Answer: A
Q3) Dan and Donna are husband and wife and file separate returns for the year.If Dan itemizes his deductions from AGI,Donna still can claim the standard deduction.
A)True
B)False
Answer: False
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Roy is considering purchasing land for $10,000.He expects the land to appreciate in value 8% each year (compounded)and he will sell it at the end of 10 years.He also is considering purchasing a bond for $10,000.The bond does not pay any annual interest,but will pay $21,589 at maturity in 10 years.The before-tax rate of return on the bond is 8%.Roy is in the 40% (combined Federal and State)marginal tax bracket.Roy has other investments that earn a 8% before-tax rate of return.Given that the compound interest factor at 8% is 2.1589,and at 4.8% the factor is 1.5981,which alternative should Roy choose?
Q2) 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?
Q3) In some foreign countries,the tax law specifically designates the types of income items that are includible in gross income.How does this approach compare with the U.S.Internal Revenue Code (§ 61)? What is a major advantage to the approach used in the U.S.tax law?
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Chapter 5: Gross Income: Exclusions
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Q1) Roger is in the 35% marginal tax bracket.Roger's employer has created a flexible spending account for medical and dental expenses that are not covered by the company's health insurance plan.Roger had his salary reduced by $1,200 during the year for contributions to the flexible spending plan.However,Roger incurred only $1,100 in actual expenses for which he was reimbursed.Under the plan,he must forfeit the $100 unused amount.His after-tax cost of overfunding the plan is $65.
A)True
B)False
Q2) Gary cashed in an insurance policy on his life.He needed the funds to pay for his terminally ill wife's medical expenses.He had paid $12,000 in premiums and he collected $30,000 from the insurance company.Gary is not required to include the gain of $18,000 ($30,000 - $12,000)in gross income.
A)True
B)False
Q3) For a person who is in the 35% marginal tax bracket,$1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax.
A)True
B)False
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Chapter 6: Deductions and Losses: in General
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Q1) All domestic bribes (i.e.,to a U.S.official)are disallowed as deductions.
A)True
B)False
Q2) Depending on the nature of the expenditure,expenses incurred in a trade or business may be deductible for or from AGI.
A)True
B)False
Q3) 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.
Q4) Briefly explain the provisions regarding the deductibility of expenditures paid for another's benefit or obligation.
Q5) Briefly discuss the disallowance of deductions for capital expenditures.
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) The domestic production activities deduction (DPAD)for 2012 cannot exceed 50% of all W-2 wages paid to employees by the taxpayer during the tax year.
A)True
B)False
Q2) Norm's car,which he uses 100% for personal purposes,was completely destroyed in an accident in 2012.The car's adjusted basis at the time of the accident was $13,000.Its fair market value was $10,000.The car was covered by a $2,000 deductible insurance policy.Norm did not file a claim against the insurance policy because of a fear that reporting the accident would result in a substantial increase in his insurance rates.His adjusted gross income was $14,000 (before considering the loss).What is Norm's deductible loss?
A) $0.
B) $100.
C) $500.
D) $9,500.
E) None of the above.
Q3) Why was the domestic production activities deduction (DPAD)enacted by Congress?
Q4) Discuss the computation of NOL remaining to be carried forward after the NOL has been applied in a carryback year.
Page 9
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) Nora purchased a new automobile on July 20,2012,for $29,000.The car was used 60% for business and 40% for personal use.In 2013,the car was used 30% for business and 70% for personal use.Nora elects not to take additional first-year depreciation.Determine the cost recovery recapture and the cost recovery deduction for 2013.
Q2) On June 1,2012,Norm leases a taxi and places it in service.The lease payments are $1,000 per month.Assuming the dollar amount from the IRS table is $241,determine Norm's inclusion amount.
A) $0.
B) $241.
C) $907.
D) $1,687.
E) None of the above.
Q3) Rick purchased a uranium interest for $10,000,000 on January 3,2012,when recoverable reserves were estimated at 200,000 units.A total of 10,000 units were extracted in 2012 and 7,000 units were sold in 2012.Gross income from the property was $2,800,000 and taxable income without the allowance for depletion was $1,000,000.Determine the depletion deduction for 2012.
Q4) 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) When is a taxpayer's work assignment in a new locale temporary? Permanent? What difference does it make?
Q2) How are combined business/pleasure trips treated for travel within the United States as opposed to foreign travel?
Q3) Qualified moving expenses include the cost of lodging but not meals during the move.
A)True
B)False
Q4) Which,if any,of the following factors is not a characteristic of independent contractor status?
A) Services are performed for more than one party.
B) Receipt of a Form 1099 reporting payments received.
C) Workplace fringe benefits are not available.
D) Work-related expenses are reported on Form 2106.
E) None of the above.
Q5) A deduction for parking and other traffic violations is allowed under the actual cost method but not the automatic mileage method.
A)True B)False
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) Antonio sold his personal residence to Mina on July 1,2012.He had paid real property taxes on March 1,2012,the due date for property taxes for 2012.How will Antonio's payment affect his deduction for property taxes in 2012? Will Antonio's payment of the taxes have any effect on Mina's itemized deductions for 2012? What other tax or financial effects will Antonio's payment of the taxes have on either party?
Q2) In the year of her death,Maria made significant charitable contributions of capital gain property.In fact,the amount of the contributions exceeds 30% of her AGI.Maria's executor can elect to deduct charitable contributions of up to 50% of Maria's AGI on Maria's final income tax return.
A)True
B)False
Q3) John gave $1,000 to a family whose house was destroyed by fire.John may claim a charitable deduction of $1,000 on his tax return for the current year.
A)True
B)False
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Chapter 11: Investor Losses
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Sample Questions
Q1) Emily earns a salary of $150,000,and invests $60,000 for a 20% interest in a passive activity.Operations of the activity result in a loss of $400,000,of which Emily's share is $80,000.How is her loss characterized?
A) $60,000 is suspended under the passive loss rules and $20,000 is suspended under the at-risk rules.
B) $60,000 is suspended under the at-risk rules and $20,000 is suspended under the passive loss rules.
C) $80,000 is suspended under the passive loss rules.
D) $80,000 is suspended under the at-risk rules.
E) None of the above.
Q2) In the current year,Lucile,who has AGI of $70,000 before considering rental activities,is active in three separate real estate rental activities and is in the 28% tax bracket.She had $15,000 of losses from Activity A,$25,000 of losses from Activity B,and income of $20,000 from Activity
A. Calculate her deductions and credits currently allowed and the suspended losses and credits.
C. She also had $3,100 of tax credits from Activity
Q3) What special passive loss treatment is available to real estate activities?
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13
Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) Which of the following can produce an AMT preference rather than an AMT adjustment?
A) Standard deduction.
B) Research and experimental expenditures.
C) Percentage depletion.
D) Incentive stock options (ISOs).
E) None of the above.
Q2) When qualified residence interest exceeds qualified housing interest,the positive adjustment required in calculating AMT is a timing adjustment.That is,in the future,there will be an offsetting negative adjustment.Comment on the validity of this statement.
Q3) If a gambling loss itemized deduction is permitted for regular income tax purposes,there will be no AMT adjustment associated with the gambling loss.
A)True
B)False
Q4) Ashlyn is subject to the AMT in 2012.She calculates her AMT base to be $200,000.What are the AMT rates that apply for Ashlyn?
Q5) For the ACE adjustment,discuss the relationship between ACE and unadjusted AMTI.
Q6) Discuss the tax year in which an AMT adjustment is first required for an ISO.
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Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) Child care payments to a relative are not eligible for the credit for child and dependent care expenses if the relative is a child (under age 19)of the taxpayer.
A)True
B)False
Q2) In computing the foreign tax credit,the greater of the foreign income taxes paid or the overall limitation is allowed.
A)True
B)False
Q3) An eligible taxpayer may elect to receive advance payments of the earned income credit from his or her employer.
A)True
B)False
Q4) For purposes of computing the credit for child and dependent care expenses,the qualifying employment-related expenses are limited to an individual's actual or deemed earned income.
A)True
B)False
Q5) Discuss the treatment of unused general business credits.
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Sample Questions
Q1) Stuart owns land with an adjusted basis of $190,000 and a fair market value of $500,000.If the property is going to be given to Stuart's nephew,Alex,it is preferable for the transfer to be by inheritance rather than by gift.
A)True
B)False
Q2) Which of the following is correct?
A) Realized gains are always recognized and realized losses are never recognized.
B) Realized gains and realized losses on the sale of personal use assets are not recognized.
C) Realized gains and realized losses on the sale of personal use assets are recognized.
D) Only a. and b. are correct.
E) None of the above.
Q3) If the fair market value of the property on the date of death is greater than on the alternate valuation date,the use of the alternate valuation amount is mandatory.
A)True
B)False
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) Pierce exchanges an asset (adjusted basis of $14,000; fair market value of $18,000)for another asset (fair market value of $15,000).In addition,he receives cash of $3,000.If the exchange qualifies as a like-kind exchange,his recognized gain is $3,000 and his adjusted basis for the property received is $17,000 ($14,000 + $3,000 recognized gain).
A)True
B)False
Q2) Amy's manufacturing plant is destroyed by fire on the afternoon of October 25,2012.The adjusted basis is $550,000.The insurance company offers a settlement of $520,000.After protracted negotiations,Amy receives $575,000 on June 20,2013.Amy is a fiscal year taxpayer whose tax year ends on June 30th.What is the latest date that Amy can invest the proceeds in qualifying replacement property and elect to defer the gain under § 1033?
Q3) Shari exchanges an office building in New Orleans (adjusted basis of $700,000)for an apartment building in Baton Rouge (fair market value of $900,000).In addition,she receives $100,000 of cash.Shari's recognized gain is $100,000 and her basis for the apartment building is $800,000 ($700,000 adjusted basis + $100,000 recognized gain).
A)True
B)False
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) In 2012,Mark has $18,000 short-term capital loss,$7,000 28% gain,and $6,000 0%/15% gain.Which of the statements below is correct?
A) Mark has a $5,000 capital loss deduction.
B) Mark has a $3,000 capital loss deduction.
C) Mark has a $13,000 net capital gain.
D) Mark has a $5,000 net capital gain.
E) Mark has a $18,000 net capital loss.
Q2) Since the Code section that defines "capital asset" says what is not a capital asset,other Code sections have to help determine what is and what is not a capital gain or loss.
A)True B)False
Q3) On January 18,2011,Martha purchased 200 shares of Blue Corporation stock for $2,000.On November 11,2012,she sold short 200 shares of Blue Corporation stock which she borrowed from her broker for $2,300.On February 10,2013,Martha closed the short sale by delivering the 200 shares of Blue Corporation stock which she had acquired in 2011.On that date,Blue Corporation stock had a market price of $4 per share.What is Martha's recognized gain or loss and its character in 2012? In 2013?
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Chapter 17: Property Transactions: Section 1231 and Recapture Provisions
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Q1) Which of the following assets held by a cash basis accounting firm is a § 1231 asset?
A) An account receivable from a client.
B) A desk used in the business and held more than one year.
C) An investment in Orange Company common stock.
D) A computer used in the business, held more than one year, but fully depreciated under § 179 when acquired.
E) b. and d.
Q2) A business machine purchased April 10,2010,for $202,000 was fully depreciated in 2010 using § 179 immediate expensing.On August 15,2012,the machine was sold for $67,000.What is the amount and nature of the gain or loss from disposition of the machine?
Q3) Section 1231 gain that is treated as long-term capital gain carries from the 2011 Form 4797 to the 2011 Form 1040,Schedule D,line ____.
A) 8.
B) 9.
C) 10.
D) 11.
E) None of the above.
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Chapter 18: Accounting Periods and Methods
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Q1) Gold Corporation,Silver Corporation,and Platinum Corporation are equal partners in the GSP Partnership,which was formed on July 1,2012.Gold and Silver use a calendar tax year,and Platinum's tax year ends June 30th.GSP is not a seasonal business.
A) GSP must use a tax year ending December 31st, and Platinum can retain its tax year ending June 30th.
B) GSP must use a tax year ending June 30th, and the partners must change their tax years to end on June 30th.
C) GSP must use a tax year ending December 31st and Platinum must change its tax year to December 31st.
D) GSP may elect its tax year without regard to the partners' tax years.
E) None of the above.
Q2) The Seagull Partnership has three equal partners.Partner A's tax year ends June 30th,and Partners B and C use a calendar year.If the partnership uses the calendar year to report its income,Partner A is permitted to defer partnership income earned from July through December 2012 until he files his tax return for his year ending June 30,2013.
A)True B)False
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Chapter 19: Deferred Compensation
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Q1) A participant has an adjusted basis of $0 in any nondeductible contributions to a traditional IRA.
A)True
B)False
Q2) From an employee's point of view,discuss the difference between the tax treatment accorded to a nonqualified stock option (NQSO)that has an ascertainable fair market value and one that does not.
Q3) Forfeitures may be allocated to the accounts of the remaining participants in a defined benefit plan.
A)True
B)False
Q4) If a taxpayer receives an early distribution from a qualified retirement plan,a 10% additional tax is levied on the full amount of any distribution includible in gross income. A)True
B)False
Q5) In a profit sharing plan,a separate account is maintained for each participant.
A)True B)False
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Chapter 20: Corporations and Partnerships
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Q1) Silver Corporation has held an S election since its formation five years ago.Which,if any,of the following will cause Silver to lose its election?
A) Silver buys stock in another corporation.
B) A shareholder sells her Silver stock to a partnership.
C) A shareholder sells his Silver stock to a citizen of Italy who is a resident of New York City.
D) A shareholder dies and the Silver stock passes to her estate.
E) None of the above.
Q2) The domestic production activities deduction of a C corporation can be passed through to its shareholders.
A)True
B)False
Q3) On March 9,2012,all of the shareholders of Kingfisher Corporation (a calendar year entity)voluntarily revoke the S election (effective as soon as possible).For all of 2012,Kingfisher Corporation will be a C corporation.
A)True
B)False
Q4) How can the Subchapter S election be lost?
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