Principles of Taxation
Exam Answer Key
Course Introduction
Principles of Taxation introduces students to the fundamental concepts underlying tax systems and tax policy. The course explores the objectives and principles guiding the imposition of taxes, the types and structures of taxes (such as income, consumption, and property taxes), and the economic, legal, and administrative implications of taxation. Emphasis is placed on understanding tax terminology, the role of taxation in fiscal policy, tax fairness and efficiency, and international perspectives. Through analysis of real-world examples and regulatory frameworks, students gain a foundational comprehension of how taxes affect individuals, businesses, and society as a whole.
Recommended Textbook
South Western Federal Taxation 2018 Individual Income Taxes 41st Edition by William H. Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
Federal Tax Law
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Sample Questions
Q1) Before the Sixteenth Amendment to the Constitution was ratified, there was no valid Federal income tax on individuals.
A)True
B)False
Answer: False
Q2) Which, if any, of the following provisions of the tax law cannot be justified as promoting administrative feasibility (simplifying the task of the IRS)?
A)Penalties are imposed for failure to file a return or pay a tax on time.
B)Prepaid income is taxed in the year received and not in the year earned.
C)Annual adjustments for indexation increases the amount of the standard deduction allowed.
D)Casualty losses must exceed 10% of AGI to be deductible.
E)A deduction is allowed for charitable contributions.
Answer: E
Q3) A deduction for certain expenses (interest and taxes) incident to home ownership. Answer: d
Q4) A Federal deduction for state and local income taxes paid.
Answer: c
Page 3
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Chapter 2: Working With the Tax Law
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Sample Questions
Q1) A researcher can find tax information on home page sites of:
A)Governmental bodies.
B)Tax academics.
C)Publishers.
D)CPA firms.
E)All of these.
Answer: E
Q2) Arizona is in the jurisdiction of the Eighth Circuit Court of Appeals.
A)True
B)False
Answer: False
Q3) Which company does not publish citators for tax purposes?
A)John Wiley & Sons
B)Commerce Clearing House
C)Thomson Reuters RIA
D)Westlaw
E)Shepard's
Answer: A
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Chapter 3: Tax Formula and Tax Determination; an
Overview of Property Transactions
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Sample Questions
Q1) In satisfying the support test and the gross income test for claiming a dependency exemption, a scholarship received by the person being claimed is handled the same way for each test. Do you agree or disagree with this statement? Why?
Answer: Disagree. For purposes of the support test, all of the scholarship is disregarded. For purposes of the gross income test, only the taxable part is considered (i.e., the nontaxable part is disregarded).
Q2) In meeting the criteria of a qualifying child for dependency exemption purposes, when if ever, might the child's income become relevant?
Answer: The amount of income earned by the qualifying child normally is of no consequence. If, however, such income is used to make the child self-supporting, then he or she can no longer be a qualifying child. Such child also would not be a qualifying relative due to the gross income and support tests.
Q3) When the kiddie tax applies, the child need not file an income tax return because the child's income will be reported on the parents' return.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) The annual increase in the cash surrender value of a life insurance policy:
A)Is taxed according to the original issue discount rules.
B)Is not included in gross income because the policy must be surrendered to receive the cash surrender value.
C)Reduces the deduction for life insurance expense.
D)Is exempt because it is life insurance proceeds.
E)None of these.
Q2) In 2017, Juan, a cash basis taxpayer, was offered $3 million for signing a professional baseball contract. He counter offered that he would receive $900,000 per year for 4 years beginning in 2018. The team accepted the counteroffer. Juan constructively received $3 million in 2017.
A)True
B)False
Q3) If a lottery prize winner transfers the prize to a qualified government unit or nonprofit organization, then the prize is excluded from the winner's gross income if the amount of the prize does not exceed 30% of the winner's AGI.
A)True
B)False
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Chapter 5: Gross Income: Exclusions
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Q1) Meg's employer carries insurance on its employees that will pay an employee his or her regular salary while the employee is away from work due to illness. The premiums for Meg's coverage were $1,800. Meg was absent from work for two months as a result of a kidney infection. Meg's employer's insurance company paid Meg's regular salary of $8,000 while she was away from work. Meg also collected $2,000 on a wage continuation policy she had purchased. Meg must include $11,800 in her gross income.
A)True
B)False
Q2) 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 these.
Q3) If a tax-exempt bond will yield approximately .65 (1 - .35) times the yield on a taxable bond of equal risk, who benefits from the tax exemption: the Federal government, the state and local governments who issue the bonds, or the investors?
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Chapter 6: Deductions and Losses: in General
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Sample Questions
Q1) Are all personal expenses disallowed as deductions?
Q2) The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction.
A)True
B)False
Q3) Martha rents part of her personal residence in the summer for 3 weeks for $3,000. Anne rents all of her personal residence for one week in December for $2,500. Anne is not required to include the $2,500 in her gross income whereas Martha is required to include the $3,000 in her gross income.
A)True
B)False
Q4) The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests. A)True
B)False
Q5) If a taxpayer operated an illegal business (not drug trafficking), what expenses can be deducted and what expenses are disallowed?
Q6) Under what circumstance can a bribe be deducted?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) Alma is in the business of dairy farming. During the year, one of her barns was completely destroyed by fire. The adjusted basis of the barn was $90,000. The fair market value of the barn before the fire was $75,000. The barn was insured for 95% of its fair market value, and Alma recovered this amount under the insurance policy. Alma has adjusted gross income for the year of $40,000 (before considering the casualty). Determine the amount of loss she can deduct on her tax return for the current year.
A)$3,750
B)$14,650
C)$14,750
D)$18,750
E)None of the above
Q2) A taxpayer can elect to forgo the NOL carryback period of 2 years.
A)True
B)False
Q3) A corporation which makes a loan to a shareholder can have a nonbusiness bad debt deduction.
A)True
B)False
Q4) Why was the domestic production activities deduction (DPAD) enacted by Congress?
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Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Sample Questions
Q1) Doug purchased a new factory building on January 15, 1990, for $400,000. On March 1, 2017, the building was sold. Determine the cost recovery deduction for the year of the sale; Doug did not use the MACRS straight-line method.
A)$0
B)$1,587
C)$2,645
D)$12,696
E)None of the above
Q2) The luxury auto cost recovery limits applies to all automobiles.
A)True
B)False
Q3) Orange Corporation begins business on April 2, 2017. The corporation reports startup expenditures of $64,000 all incurred last year. Determine the total amount that Orange can elect to deduct in 2017.
A)$0
B)$3,200
C)$4,267
D)$7,950
E)None of the above
10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) Qualified moving expenses include the cost of lodging but not meals during the move.
A)True
B)False
Q2) In choosing between the actual expense method and the automatic mileage method, a taxpayer should consider the cost of insurance on the automobile.
A)True
B)False
Q3) Qualified tuition and related expenses (under § 222)
Q4) Deduction by an employee of unreimbursed office-in-the-home expenses
Q5) A taxpayer who uses the automatic mileage method for the business use of an automobile can change to the actual cost method in a later year.
A)True
B)False
Q6) During 2017, Eva used her car as follows: 12,000 miles (business), 1,400 miles (commuting), and 4,000 miles (personal). In addition, she spent $440 for tolls (business) and $620 for parking (business). If Eva uses the automatic mileage method, what is the amount of her deduction?
Page 11
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) Trent sells his personal residence to Chester on July 1, 2017. He had paid $7,000 in real property taxes on March 1, 2017, the due date for property taxes for 2017. Trent may not deduct the portion of the taxes he paid for the period the property was owned by Chester.
A)True
B)False
Q2) Interest paid or accrued during the tax year on aggregate acquisition indebtedness of $2 million or less ($1 million or less for married persons filing separate returns) is deductible as qualified residence interest.
A)True
B)False
Q3) 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?
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Chapter 11: Investor Losses
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Sample Questions
Q1) Kim dies owning a passive activity with a basis of $75,000, a fair market value of $140,000, and suspended losses of $80,000. All of the $80,000 passive activity loss can be deducted on Kim's final income tax return.
A)True
B)False
Q2) Raul is married and files a joint tax return. His current investment interest expense of $95,000 is related to a loan used to purchase a parcel of unimproved land. Income from investments [dividends (not qualified) and interest] total $18,000. Raul paid $5,000 of real estate taxes on the unimproved land. He also has a $4,500 net long-term capital gain from the sale of another parcel of unimproved land. Raul's maximum investment interest deduction for the year is:
A)$95,000.
B)$18,000.
C)$17,500.
D)$13,000.
E)None of the above.
Q3) Treatment of a sale of a passive activity where all of the realized gain or loss is recognized currently.
Q4) Material participation.
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Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) Which of the following statements regarding differences in the corporate and the individual AMT calculation is most correct?
A)The corporate AMT does not provide for a minimum tax credit.
B)Both the corporate and the individual AMT exemption amounts phase out once a certain level of AMTI is reached.
C)Unlike the corporate AMT, the only credit available to reduce an individual's tentative minimum tax (TMT) is the foreign tax credit.
D)Both the individual and the corporate AMT rates are graduated.
Q2) Paul incurred circulation expenditures of $180,000 in 2017 and deducted that amount for regular income tax purposes. Paul has a $60,000 negative AMT adjustment for each of 2018, 2019, and for 2020.
A)True
B)False
Q3) Are the AMT rates for the individual taxpayer the same as those for a corporate taxpayer?
Q4) The corporate AMT does not apply to "small" C corporations.
A)True
B)False
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Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) Cardinal Company incurs $800,000 during the year to construct a facility that will be used exclusively for the care of its employees' pre-school age children during normal working hours. Assuming Cardinal claims the credit for employer-provided child care this year, its basis in the newly constructed facility is $640,000.
A)True
B)False
Q2) The disabled access credit was enacted to encourage small businesses to make their businesses more accessible to disabled individuals.
A)True
B)False
Q3) Discuss the treatment of unused general business credits.
Q4) Cheryl is single, has one child (age 6), and files as head of household during 2016. Her salary for the year is $19,500. She qualifies for an earned income credit of the following amount.
A)$0.
B)$3,115.
C)$3,215.
D)$3,400.
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Sample Questions
Q1) Lynn purchases a house for $52,000. She converts the property to rental property when the fair market value is $115,000. After deducting depreciation (cost recovery) expense of $1,130, she sells the house for $120,000. What is her recognized gain or loss?
A)$0
B)$6,130
C)$37,630
D)$69,130
E)None of the above
Q2) Jacob owns land with an adjusted basis of $140,000 and a fair market value of $115,000. Determine the amount of realized and recognized gain or loss to the seller and the adjusted basis for the buyer for each of the following. a.Jacob sells the land for $115,000 to a corporation in which he owns 60% of the stock. b.Jacob sells the land for $115,000 to a partnership in which he has a capital and profits interest of 60%.
Q3) If a taxpayer purchases a business and the price exceeds the fair market value of the listed assets, how is the excess allocated among the purchased assets?
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Page 16
Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) The holding period of replacement property where the election to postpone gain is made includes the holding period of the involuntarily converted property.
A)True
B)False
Q2) If boot is received in a § 1031 like-kind exchange and gain is recognized, which formula correctly calculates the basis for the like-kind property received?
A) Adjusted basis of like-kind property surrendered + gain recognized - fair market value of boot received.
B) Fair market value of like-kind property surrendered + gain recognized + fair market value of boot received.
C) Fair market value of like-kind property received - postponed gain.
D) Only a. and c.
E) None of the above.
Q3) Ramon sells land with an adjusted basis of $120,000 and a fair market value of $175,000 to Pauline, his wife, for $175,000. Discuss how the tax consequences would differ if Ramon and Pauline had never been married.
Q4) Define an involuntary conversion.
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) Martha is unmarried with one dependent and files as head of household. She had 2017 taxable income of $45,000 which included $16,000 of 0%/15%/20% net long-term capital gain. What is her tax on taxable income using the alternative tax on net long-term capital gain method?
Q2) When an individual taxpayer has a net long-term capital gain that includes both 28% gain and 0%/15%/20% gain, which of these gains will be taxed first when the alternative tax on net long-term capital gain method is used and what difference does it make?
Q3) A business taxpayer sells inventory for $80,000. The adjusted basis of the property is $58,000 at the time of the sale and the inventory had been held more than one year. The taxpayer has:
A)No gain or loss.
B)Sold a long-term capital asset.
C)Sold a short-term capital asset.
D)An ordinary gain.
E)None of the above.
Q4) A franchisor licenses its mode of business operation to a franchisee.
A)True
B)False
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Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Q1) Which of the following would be included in the netting of § 1231 gains and losses?
A) Personal use property net casualty gain.
B) Section 1231 loss.
C) Section 1231 gain.
D) All of the above.
E) b. and c.
Q2) Spencer has an investment in two parcels of vacant land. Parcel 1 is a capital asset and parcel 2 is a § 1231 asset. Spencer already has short-term capital loss for the year he would like to offset with capital gain. Spencer has § 1231 lookback loss that exceeds the gain from the disposition of either land parcel. Spencer only wants to sell one land parcel and each of them would yield the same amount of gain. The gain that would be recognized exceeds the short-term capital loss Spencer already has. Which of the statements below is correct?
A)Spencer will have a net capital loss no matter which land parcel he sells.
B)Spencer will have a net capital loss if he sells parcel 2.
C)Spencer will have a net capital loss if he sells parcel 1.
D)Spencer will have a net capital gain if he sells either parcel 1 or parcel 2.
E)None of the above.
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Chapter 18: Accounting Periods and Methods
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Q1) Snow Corporation began business on May 1, 2017, and elected to use the calendar year for tax purposes. Brown Corporation, a calendar year corporation, sold all of its assets and liquidated as of April 30, 2017. Neither Snow Corporation nor Brown Corporation must annualize their income for their 2017 returns.
A)True B)False
Q2) Gold Corporation, Silver Corporation, and Platinum Corporation are equal partners in the GSP Partnership, which was formed on July 1, 2017. 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.
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Page 20
Chapter 19: Deferred Compensation
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Q1) After 2011, income averaging is allowed for Federal income tax purposes.
A)True
B)False
Q2) The special § 83(b) election (i.e., where income is taxed in the year of the grant) with respect to a restricted stock plan may be advantageous in which of the following situations in 2017?
A)The employer is an unstable company.
B)The bargain element is relatively small.
C)A minimum amount of appreciation is expected in the future.
D)The restriction probably will not be satisfied.
E)None of the above.
Q3) Zackie has five years of service completed as of February 5, 2017, which is his employment anniversary date. If his defined benefit plan [not a § 401(m) arrangement] uses the graded vesting rule, determine Zackie's nonforfeitable percentage.
A)40%
B)60%
C)80%
D)100%
E)None of the above
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Chapter 20: Corporations and Partnerships
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Q1) Mel, Fred, and Mary form Canary Corporation. Mel and Fred each contribute cash of $250,000, while Mary contributes land (basis of $100,000; fair market value of $300,000). Each transferor receives one-third of Canary's shares, and Mary also receives $50,000 in cash. Which, if any, of the following choices is a correct result of the incorporation?
A)Canary Corporation's basis in the land is $100,000.
B)Canary's basis in the land is $150,000.
C)Canary's basis in the land is $300,000.
D)Mary's basis in the Canary stock is $450,000.
E)None of the above.
Q2) Auburn Corporation owns 6% of the stock in Cerulean Corporation. During the year, Auburn received cash dividends of $800,000 from this investment. Determine Auburn Corporation's dividends received deduction based on the following assumptions:
a.Taxable income before the deduction is $960,000.
b.Taxable income before the deduction is $720,000.
c.Taxable income before the deduction is $480,000.
Q3) Recapture of depreciation on real property can be more severe.
Q4) Amount the corporation borrows from a bank increases the basis its shareholders have in their stock.
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