Principles of Taxation Pre-Test
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Course Introduction
Principles of Taxation introduces students to the foundational concepts, rules, and structures underpinning tax systems, with a primary focus on individual and business taxation. The course explores the rationale behind taxation, types of taxes, methods of tax assessment, and the legal and ethical obligations of taxpayers. Emphasis is placed on understanding the objectives of tax policy, tax administration, and compliance requirements, as well as the economic and social impacts of taxation. Students will analyze tax legislation and apply basic tax principles to common scenarios, developing essential skills for further study or careers in accounting, finance, and public policy.
Recommended Textbook
Prentice Halls Federal Taxation 2014 Individuals 27th Edition by Timothy J. Rupert
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Chapter 1: An Introduction to Taxation
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Q1) Regressive tax rates decrease as the tax base increases.
A)True
B)False
Answer: True
Q2) The marginal tax rate is useful in tax planning because it measures the tax effect of a proposed transaction.
A)True
B)False
Answer: True
Q3) Describe the types of audits that the IRS conducts.
Answer: In an office audit,the taxpayer goes to the IRS office and brings substantiation for a particular deduction,credit or income item.An office audit does not involve a complete audit for all items on the return.A field audit is used for corporations engaged in a trade or business.A field audit generally is broader in scope than an office audit.A field audit usually is conducted at the taxpayer's place of business or the office or his or her tax advisor.Most large corporations are subject to annual audits.
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Chapter 2: Determination of Tax
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Q1) Rena and Ronald,a married couple,each earn a salary of $200,000.They will be required to pay additional payroll taxes in 2013 of
A)$-0-.
B)$1,350.
C)$1,800.
D)$5,800.
Answer: B
Q2) Which of the following credits is considered a refundable credit?
A)child and dependent care credit
B)earned income credit
C)adoption expense credit
D)lifetime learning credit
Answer: B
Q3) A child credit is a partially refundable credit.
A)True
B)False
Answer: True
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Chapter 3: Gross Income: Inclusions
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Q1) The requirements for a payment to be considered as alimony include all of the following except
A)be made in cash or property.
B)be made pursuant to a divorce,separation or a written agreement between the spouses.
C)terminate at the death of the payee.
D)not be designated as being other than alimony.
Answer: A
Q2) Distributions from corporations to the shareholders in a nonliquidating distribution will usually be classified as a dividend up to the amount of the corporation's
A)earnings and profits.
B)retained earnings.
C)taxable income for the year.
D)stock basis.
Answer: A
Q3) Unemployment compensation is exempt from federal income tax.
A)True
B)False
Answer: False
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Chapter 4: Gross Income: Exclusions
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Q1) In 2006,Gita contributed property with a basis of $500,000 and a fair market value of $3,000,000 to a qualified small business corporation for all of its common stock.She sells the stock in 2013 for $4,000,000.What is the amount of taxable gain on the transaction?
Q2) Amanda,who lost her modeling job,sued her employer for age discrimination.She was awarded $75,000 in lost wages,$25,000 for emotional distress,and $150,000 punitive damages.The amount taxable is
A)$-0-.
B)$150,000.
C)$225,000.
D)$250,000.
Q3) Martina,who has been employed by the Smythe Corporation for ten years,receives a $400 watch as a length of service award in a meaningful presentation.The fair value of the watch is taxable.
A)True
B)False
Q4) Discuss briefly the options available for avoiding double taxation for the U.S.citizen earning income from sources outside the United States.
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Chapter 5: Property Transactions: Capital Gains and Losses
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Q1) Stock purchased on December 15,2012,which becomes worthless in March 2013 produces a STCL since the holding period is one year or less.
A)True
B)False
Q2) Kathleen received land as a gift from her grandfather.At the time of the gift,the land had a FMV of $85,000 and an adjusted basis of $110,000 to Kathleen's grandfather.One year later,Kathleen sold the land for $80,000.What was her gain or (loss)on this transaction?
A)no gain or loss
B)( $5,000)
C)$5,000
D)$30,000
Q3) If Houston Printing Co.purchases a new printing press during the current year for $30,000,pays sales taxes of $2,000,and pays $1,000 for installation,the cost basis for the printing press is $33,000.
A)True
B)False
Q4) Distinguish between the Corn Products doctrine and the ruling in the Arkansas Best Corporation case.
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Chapter 6: Deductions and Losses
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Q1) Super Development Company purchased land in the current year from Riverside Chemicals,Inc.The land was contaminated with harmful pollutants,so Super Development paid $1,000,000 to remove the contaminants.What tax issue(s)should be considered before Super files its current year tax return?
Q2) If an activity produces a profit for at least two years during a consecutive five-year period,the burden of proof shifts to the IRS to show that the activity is not profit-motivated.
A)True
B)False
Q3) Generally,expenses incurred in an investment activity other than those incurred to produce rent and royalties are deductions from AGI.
A)True
B)False
Q4) Points paid to refinance a mortgage on a principal residence are fully deductible in the year paid.
A)True
B)False
Q5) What must a taxpayer do to properly document a deductible travel or entertainment expense?
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Chapter 7: Itemized Deductions
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Q1) Expenditures for a weight reduction program are deductible if recommended by a physician to treat a specific medical condition such as hypertension caused by excess weight.
A)True
B)False
Q2) Don's records contain the following information: 1.Donated stock having a fair market value of $3,600 to a qualified charitable organization.He acquired the stock five months previously at a cost of $2,400.
2)Paid $700 to a church school as a requirement for the enrollment of his daughter.
3)Paid $200 for annual homeowner's association dues.
4)Drove 400 miles in his personal auto at 14 cents per mile.The travel was directly related to volunteer services he performed for his church (actual costs were not available).
What is Don's charitable contribution deduction?
A)$2,456
B)$3,156
C)$3,356
D)$3,656
Q3) Explain how tax planning may allow a deduction of qualified medical expenses.
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Chapter 8: Losses and Bad Debts
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Q1) Partnerships and S corporations must identify their business and rental activities by applying the passive activity rules at the partnership or S corporation level and then must report the results of their operations by activity to the partners or shareholders.
A)True
B)False
Q2) A passive activity includes any rental activity or any trade or business in which the taxpayer does not materially participate.
A)True
B)False
Q3) Once an activity has been classified as passive,it is considered passive with regard to that taxpayer until it is sold.
A)True
B)False
Q4) If a taxpayer disposes of an interest in a passive activity,unused carryover losses are available to the purchaser of the interest.
A)True
B)False
Q5) What are some factors which indicate that a debt may be worthless?
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Chapter 9: Employee Expenses and Deferred Compensation
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Q1) Characteristics of profit-sharing plans include all of the following with the exception of
A)a predetermined formula is used to allocate employer contributions to individual employees and to establish benefit payments.
B)forfeitures of benefits under the plan may be reallocated to the remaining participants.
C)the company must make contributions to the plan if it has profits during the year.
D)annual employer contributions are not required,but substantial,recurring contributions must be made to satisfy the requirement that the plan be permanent.
Q2) Incidental costs such as gift wrapping,mailing,and delivery of gifts are included in the $25 per donee limitation.
A)True
B)False
Q3) All taxpayers are allowed to contribute funds to Health Savings Accounts to supplement their health insurance.
A)True
B)False
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Chapter 10: Depreciation, cost Recovery, amortization, and Depletion
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Q1) All of the following are true with regard to the alternative depreciation system except
A)the principal type of property for which ADS is required is any tangible property which is used predominantly outside of the United States.
B)the ADS election is available to real property on a property by property basis.
C)the ADS election is available to personal property on a property by property basis.
D)once the ADS election is made for specified property,it is irrevocable.
Q2) Sec.179 tax benefits are recaptured if at any time an asset is converted to personal use.
A)True
B)False
Q3) Costs that qualify as research and experimental expenditures include all of the following except
A)depreciation of laboratory equipment.
B)management studies.
C)costs incurred in developing product improvements.
D)costs of obtaining a patent such as attorney fees.
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Chapter 11: Accounting Periods and Methods
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Q1) On June 11,two years ago,Gia sold land with a cost of $15,000 for $45,000.Gia collected $20,000 initially and is scheduled to receive $5,000 each year for five years starting last year plus an acceptable rate of interest.This year,Gia decided to sell one installment note to a bank that agreed to pay $4,100.As a result of the sale of the note,Gia must report
A)$0.
B)$1,667 gain.
C)$2,433 gain.
D)($900)loss.
Q2) A subsidiary corporation filing a consolidated return with its parent corporation must change its accounting period to conform with its parent's tax year.
A)True
B)False
Q3) Alvin,a practicing attorney who also owns an office supplies store,may use the cash basis for his practice and the accrual basis for his office supplies store.
A)True
B)False
Q4) Discuss the purpose of the imputed interest rules.
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Chapter 12: Property Transactions: Nontaxable Exchanges
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Q1) If a principal residence is sold before satisfying the ownership and use tests,part of the gain may be excluded if the sale is due to a change in employment,health,or unforeseen circumstances.
A)True
B)False
Q2) Which of the following statements with respect to a like-kind exchange is false?
A)Property of one class must be exchanged for property of the same class.
B)An exchange of inventory does not qualify as a like-kind exchange.
C)Personal property must be exchanged for personal property.
D)Sale of property and subsequent purchase of like-kind property will always qualify as a like-kind exchange.
Q3) Alex owns an office building which the state condemns on January 15,2013.Alex receives the condemnation award on April 1,2013.In order to qualify for nonrecognition of gain on this involuntary conversion,what is the last date for Alex to acquire qualified replacement property?
A)January 15,2015
B)January 15,2016
C)December 31,2015
D)December 31,2016
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Chapter 13: Property Transactions: Section 1231 and Recapture
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Q1) Emma owns a small building ($120,000 basis and $123,000 FMV)and equipment ($35,000 basis and $22,000 FMV).Both assets were acquired three years ago,are used in Emma's business,and are depreciated using straight-line depreciation.Both are destroyed by fire.Insurance proceeds were equal to their FMVs.Only one other transfer of an asset occurs during the year,and a $3,000 LTCL is recognized.After considering all transactions,the tax result to Emma is a
A)$13,000 NLTCL.
B)$13,000 ordinary loss.
C)$3,000 LTCG; $3,000 LTCL; and $13,000 ordinary loss.
D)$10,000 net ordinary loss and a $3,000 NLTCL.
Q2) In order to be considered Sec.1231 property,all of the following livestock must be held for 12 months or more from date of acquisition except A)goats.
B)hogs.
C)sheep.
D)cattle.
Q3) Sec.1245 can increase the amount of gain recognized on an asset.
A)True
B)False
Page 15
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Chapter 14: Special Tax Computation Methods, tax Credits, and Payment of Tax
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Q1) Self-employment taxes include components for A)Medicare hospital insurance and SUTA.
B)OASDI and FUTA.
C)FICA and FUTA.
D)OASDI and Medicare hospital insurance.
Q2) When a husband and wife file a joint return and both have self-employment income,the self-employment tax must be computed separately.
A)True
B)False
Q3) Marguerite and Josephus have two children,ages 13 and 10.Their modified AGI is $120,500.What is their child tax credit?
A)$900
B)$1,000
C)$2,000
D)None of the above.
Q4) The adoption credit based on qualified adoption expenses is generally allowed in the year the adoption is finalized.
A)True
B)False
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Chapter 15: Tax Research
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Q1) Identify which of the following statements is false.
A)The U.S.Tax Court must follow the previous decisions of the U.S.District Court for the district in which the taxpayer lives.
B)The U.S.Tax Court follows the previous decisions of the U.S.Court of Appeals to which the tax matter is appealable.
C)The opportunity for "forum shopping" occurs when different precedents on the same point exist.
D)The U.S.Tax Court may intentionally issue conflicting decisions.
Q2) According to the Statements on Standards for Tax Services,if a CPA believes that a client's prior-year tax return contains false information,the CPA should report this to the A)IRS.
B)SEC.
C)AICPA.
D)None of the above.The CPA does not report the false information to any external agencies,unless required by law.
Q3) Discuss the purposes and scope of temporary regulations.
Q4) Distinguish between an annotated tax service and a topical tax service.
Q5) Where must a tax researcher look to access all Tax Court cases?
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Chapter 16: Corporations
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Q1) A corporation may make an election to forego the NOL carryback in order to carry the NOL forward only.
A)True
B)False
Q2) A corporation's E&P is equal to its taxable income for the year.
A)True
B)False
Q3) If a corporation reports both a NLTCG and a NSTCG after netting all capital gains and losses,both the NLTCG and the NSTCG are subject to tax at rates applicable to ordinary income.
A)True
B)False
Q4) For purposes of the accumulated earnings tax,reasonable needs of the business include all of the following with the exception of A)making loans to stockholders.
B)providing working capital for the business.
C)acquiring the assets or stock of another business.
D)reasonably anticipated expansion of the business and plant replacement.
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Chapter 17: Partnerships and S Corporations
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Q1) The basis of a partner's interest in a partnership is adjusted to reflect each partner's share of income and deduction items only if a distribution is made to the partners.
A)True
B)False
Q2) On July 1,Joseph,a 10% owner,sells his interest in ABC Partnership to Andy,an outsider,for $165,000 cash and the release from $20,000 of partnership liabilities.Joseph's partnership interest at the beginning of the year was $120,000.The partnership earned income through June 30 of $100,000.Joseph's share of partnership liabilities increased by $5,000 from January 1 to June 30.What are the tax consequences to Joseph on the sale of his partnership interest (assume the partnership does not hold any inventory or unrealized receivables)?
A)$45,000 capital gain
B)$50,000 capital gain
C)$55,000 capital gain
D)$65,000 capital gain
Q3) What are special allocations of partnership items and when are they permitted?
Q4) What is the primary purpose of Form 1065,Partnership Tax Return?
Q5) Why are some partnership items separately stated?
Q6) Discuss the concept of partnership guaranteed payments.
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Chapter 18: Taxes and Investment Planning
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Q1) Investments conforming to the Current Model provide no deferral advantages because earnings are taxed currently.
A)True
B)False
Q2) The general form of the annualized after-tax rate of return (annualized ATROR)can be expressed as
A)r<sub>ann</sub> = [(1 + R)<sup>n</sup>(1 - t<sub>n</sub>)+ t<sub>n</sub>]<sup>1/n</sup> - 1.
B)r<sub>ann</sub> = [(1 - R)<sup>n</sup>(1 - t)+ t]<sup>1/n</sup> - 1.
C)r<sub>ann</sub> = [(1 + R)<sup>n</sup>(1 + t)+ t]<sup>1/n</sup> - 1.
D)r<sub>ann</sub> = [(1 + R)<sup>n</sup>(1 + t)- t]<sup>1/n</sup> - 1.
Q3) Which of the following concerning implicit taxes and clienteles is not true?
A)Market forces drive down the BTROR of tax-favored assets.
B)The reduced return of tax-favored assets is an implicit tax.
C)Investors whose tax rate exceeds that of the marginal investor can reap some benefit through the clientele effect.
D)Marginal investors will always benefit from the implicit tax on tax-favored investments.
Q4) What are the characteristics of the Pension Model?
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