Principles of Taxation Question
Bank
Course Introduction
Principles of Taxation introduces students to the fundamental concepts and frameworks underlying tax systems, with a particular focus on the structure and function of taxation in modern economies. The course explores the rationale for taxation, types of taxes (such as income, consumption, and property taxes), and the principles of equity, efficiency, and simplicity in tax design. Students will examine how tax policies impact individuals, businesses, and government finances, and will develop a foundational understanding of tax compliance, administration, and the ethical considerations associated with taxation. The course also provides a basis for analyzing current tax issues and reforms in both domestic and international contexts.
Recommended Textbook
Concepts in Federal Taxation 2014 21st Edition by Kevin E. Murphy
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2
Chapter 1: Federal Income Taxation - an Overview
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Sample Questions
Q1) When planning for an investment that will extend over several years,the ability to predict how the results of the investment will be taxed is important.This statement is an example of
A)Certainty.
B)Transparency
C)Equality.
D)Neutrality.
E)Fairness.
Answer: A
Q2) Frank and Fran are married and have a 2013 taxable income of $280,000.They also received $20,000 of tax-exempt income.Their average tax rate is:
A)23.1%
B)24.5%
C)25.3%
D)33.0%
E)35.0%
Answer: B
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Chapter 2: Income Tax Concepts
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Sample Questions
Q1) Under the pay-as-you-go concept,the tax base used to compute the taxpayer's income tax liability is a net income number.
A)True
B)False
Answer: False
Q2) Robin owns an appliance store.Robin gives Tim a stereo unit to paint the front of her store building.The stereo unit,included in Robin's inventory at a cost of $400,normally retails for $700.If Tim had billed Robin for his work like he charged other customers,he would have sent Robin a bill for $600.Does Tim have income from the receipt of the stereo unit? If so,what amount should Tim report as gross income? Explain in terms of the Income Tax Concepts.
Answer: Under the All-inclusive Income Concept,all income received is taxable unless specifically excluded.Income can be received in any form; it does not have to be received in cash (cash-equivalent approach).Therefore,Tim realized income when he received the stereo unit because it resulted in an increase in his wealth and was the result of an Arms-length Transaction.Tim must include the $700 fair market value of the stereo in his gross income because that is the value he received in exchange for his services.
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Page 4
Chapter 3: Income Sources
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Sample Questions
Q1) The income tax treatment of payments from annuity contracts is based on the:
I.Capital Recovery Concept
II.Assignment of Income Doctrine
III.Annual Accounting Period Concept
IV.Arm's-Length Transaction Concept
A)Only statement I is correct.
B)Only statement IV is correct.
C)Only statements II and III are correct.
D)Only statements I and IV are correct.
E)Only statements I and III are correct.
Answer: E
Q2) For any unrecovered portion of an annuity investment,the taxpayer is allowed a deduction in the year of death.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Income Exclusions
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Sample Questions
Q1) Angie's employer has a qualified pension plan.The employer makes all payments into the plan; employees do not contribute to the plan.During the current year,the employer pays $5,000 into the plan on Angie's behalf.Which of the following statements is true?
I.Angie is not taxed on the $5,000 in the current year.
II.The $5,000 payment is excluded from her income in the current year,but she will pay tax on the $5,000 as she receives it.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Dick lives rent-free in an apartment (value $675/month)in a complex where he is the apartment manager and must be on the premises to handle problems.
A)Fully excluded from gross income.
B)Fully included in gross income.
C)Partially excluded from gross income.
Q3) What are the differences between a cafeteria plan and a flexible benefits (salary reduction)plan?
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Chapter 5: Introduction to Business Expenses
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Sample Questions
Q1) Marian,a schoolteacher in Duluth,Minnesota,owns a rental house in Scottsdale,Arizona.She travels to Arizona during spring break to inspect her property and discuss property improvements with the tenant and property manager.Marian's brother,Brian,lives in Scottsdale.She stays at his house during her week in Arizona and borrows his car to travel across town for her day of meetings.Her trip accomplishes several objectives: a visit with her brother,a trip away from Wisconsin's winter weather,and a review of her investment property.The expenses of traveling to Scottsdale I.have a dominant business purpose.
II.are deductible as expenses for the production of income.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Ona is a professional musician.She prepared her music teacher's tax return in exchange for music lessons.Since she is a cash basis taxpayer,she cannot take a deduction for the music lessons.
A)True
B)False
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Page 7
Chapter 6: Business Expenses
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Sample Questions
Q1) Nonbusiness bad debt
A)Not deductible.
B)Short-term capital loss.
C)Limited to $25 per person.
D)Deductible as an ordinary loss
E)Only 50% of the cost is deductible.
F)Must be away from tax home overnight to be deductible.
G)General area where a taxpayer conducts principal activity.
H)If the "directly-related" test fails; this test may allow the deduction.
Q2) Concerning individual retirement accounts (IRAs),
I.A single taxpayer that is not an active participant in a qualified plan may deduct up to $6,000 of the annual contribution.
II.A taxpayer that is not working outside of the home may not deduct any amount if their spouse is an active participant in a qualified plan,unless their AGI is below $59,000.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
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Chapter 7: Losses: Deductions and Limitations
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Sample Questions
Q1) During the year,Daniel sells both of his personal vehicles.On January 10,he realizes a $9,000 loss on the sale of the first car.On April 5,he realizes a $1,000 gain on the sale of the second car.Assume Daniel's salary for the year is $50,000,and he has no other income.What is Daniel's Adjusted Gross Income?
A)$40,000
B)$41,000
C)$42,000
D)$50,000
E)$51,000
Q2) Jennifer's business storage shed is damaged by a hail storm.The shed is uninsured.Its adjusted basis is $8,000.Just before the accident the shed is appraised for $10,000.In its damaged condition,the shed can be sold for $4,000.What is Jennifer's loss from the storm?
A)$ - 0 -
B)$ 4,000
C)$ 6,000
D)$ 8,000
E)$10,000
Q3) Why did Congress enact the at-risk rules?
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Page 9
Chapter 8: Taxation of Individuals
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Sample Questions
Q1) The American Opportunity Scholarship Tax Credit provides for a 100% tax credit on the first $2,000 of qualifying expenses and a 50% tax credit for the next $2,000 of qualifying expenses paid during the year for each qualifying student.
A)True
B)False
Q2) Explain the non-support test and the principle residence test to be a qualifying child.
Q3) Mary Lou is a 22-year old student at Wilson College.She earned $4,300 at a summer job,which is less than half of her support.
I.Mary Lou can claim a personal exemption for herself even if her parents claim her as a dependent.
II.Because Mary Lou is a full-time college student,and she provides less than half of her own support,her parents must claim her as a dependent on their return.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q4) Explain the support test and the gross income test to be a qualifying relative.
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Chapter 9: Acquisitions of Property
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Sample Questions
Q1) Mary inherits an interest in Laser Partnership from her Aunt Lillian during 2013.The fair market value of the interest as of the primary valuation date is $28,000.Aunt Lillian's adjusted basis was $16,000.What is Mary's initial basis and holding period in the partnership interest if she sells the interest seven months after inheriting it?
A)$16,000, short-term.
B)$16,000, long-term.
C)$28,000, short-term.
D)$28,000, long-term.
E)Both depend on whether it is sold at a gain or a loss.
Q2) Makemore Company purchases a factory for $800,000.The purchase price is properly allocated 90% to the building and 10% to the land.In the first year,Makemore adds a storage shed to the building at a cost of $8,000.The utility company pays Makemore $1,500 for an easement to run utility lines across the land.A total depreciation of $45,000 is deducted over the 3 years.Determine the adjusted basis of the building and the land as of the end of year 3:
A)$728,000 building; $ 78,500 land
B)$683,000 building; $ 80,000 land
C)$683,000 building; $ 78,500 land
D)$728,000 building; $ 80,000 land
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11
Chapter 10: Cost Recovery on Property: Depreciation, depletion,
and Amortization
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Sample Questions
Q1) Which of the following is not part of the modified accelerated cost recovery system (MACRS)?
A)Salvage value is ignored.
B)Used property can use MACRS.
C)Straight-line depreciation is allowed.
D)Sum-of-the-years digits depreciation is allowed.
E)All of the above are part of MACRS.
Q2) Qualified Section 179 property for a retail store includes
I.Store shelving.
II.Company auto used by salesmen.
III.Sidewalks in front of the store.
IV.Delivery van owned by the store.
A)Only statement I is correct.
B)Only statement III is correct.
C)Statements I and IV are correct.
D)Statements II and III are correct.
E)Statements I, II, and IV are correct.
Q3) Under current law,taxpayers must use regular MACRS.
A)True
B)False
Page 12
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Chapter 11: Property Dispositions
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Sample Questions
Q1) Omicron Corporation had the following capital gains and losses for 2011 through 2013: \(\begin{array} { l l l l l } \underline{2011} & \underline{2012}&\underline{2013}\\ \$ 15,000 & \$(30,000) & \$ 60,000 \end{array}\)
Omicron's net capital gain for 2013 is:
A)$20,000
B)$30,000
C)$45,000
D)$60,000
Q2) When securities are sold and the securities were purchased on different dates and at different prices
I.the basis of the shares may be determined on a first-in,first-out basis.
II.the basis of the shares may be determined on a last-in,first-out basis.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) What incentive provisions or preferential treatments exist for capital gains?
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Page 13
Chapter 12: Nonrecognition Transactions
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Sample Questions
Q1) The general mechanism used to defer gains and losses from a transaction includes certain adjustments to the basis of the replacement property.These adjustments include I.subtracting deferred losses.
II.adding deferred gains.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Simon exchanged his Mustang for Michael's Econovan so that he could go hunting.The exchange does not qualify as a like-kind exchange since the assets are personal.
A)True
B)False
Q3) Personal residence for an apartment building.
A)qualifies as a like-kind exchange
B)does not qualify as a like-kind exchange
Q4) Office copier for an office fax machine.
A)qualifies as a like-kind exchange
B)does not qualify as a like-kind exchange
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Chapter 13: Choice of Business Entity - General Tax and
Nontax
Factorsformation
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Sample Questions
Q1) Nick and Rodrigo form the NRC Partnership by combining the assets of their respective businesses.Nick contributes $10,000 and assets worth $90,000 (adjusted basis of $60,000)for a 1/3 interest.Rodrigo contributes $90,000 and assets worth $270,000 (adjusted basis of $150,000)for a 2/3 interest.NRC also assumes $60,000 of debt on Rodrigo's assets.What is Nick's basis in his partnership interest?
A)$ 70,000
B)$ 90,000
C)$100,000
D)$120,000
E)$160,000
Q2) Corporations can use a 52- to 53-week fiscal year end,but the year must end on Saturday each year.
A)True
B)False
Q3) Partnership debts assumed by a partner is deemed to be a cash contribution and increases the partner's basis in the partnership.
A)True
B)False
Q4) Discuss the characteristics of a personal service corporation (PSC).
Page 15
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Chapter 14: Choice of Business Entity - Operations and Distributions
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Sample Questions
Q1) Harrison Corporation sells a building for $330,000 in the current year.Harrison purchased the building in 2004 for $250,000 and had taken $20,000 in depreciation on the building up to the date of its sale.How should Harrison report the gain on the sale of the building?
A)Section 1231 gain of $100,000.
B)Ordinary income of $100,000.
C)Section 1231 gain of $80,000 and ordinary income of $20,000.
D)Section 1231 gain of $96,000 and ordinary income of $4,000.
E)Ordinary income of $96,000 and Section 1231 gain of $4,000.
Q2) A corporation may reduce trade or business income by a charitable contributions made by the corporation,but the deduction is limited to 10% of taxable income,as adjusted..
A)True
B)False
Q3) Separate entity that never pays income taxes
A)Sole Proprietorship.
B)Partnership.
C)Corporation.
D)S Corporation.
Page 16
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Chapter 15: Choice of Business Entity - Other
Considerations
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Sample Questions
Q1) Kathy and Patrick are married with salaries of $28,000 and $21,000,respectively.Adjusted gross income on their jointly filed tax return is $54,000.Both individuals are active participants in employer provided qualified pension plans.What are Kathy and Patrick's maximum combined IRA contribution and deduction amounts? \(\begin{array}{ll}
\text { Contribution } & \text { Deduction } \\
a.\$-0- & \$-0- \\
b.\$ 11,000 & \$-0- \\
c.\$ 5,500 & \$ 5,500 \\
d.\$ 11,000 & \$ 8,000 \\
e.\$ 11,000 & \$ 11,000
\end{array}\)
Q2) Harriet is an employee of Castiron Inc.and earns $200,000 in 2012.The maximum amount Castiron can contribute to a money purchase plan on behalf of Harriet is
A)$40,000
B)$45,000
C)$46,000
D)$49,000
E)$50,000
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Chapter 16: Tax Research
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Sample Questions
Q1) Tax regulations are first issued in
A)Proposed form
B)Revised form
C)Temporary form
D)Final form
E)Either A or C
Q2) Primary sources of tax law include
I.Treasury Regulations.
II.IRS Revenue Procedures.
III.Internal Revenue Code of 1986.
IV.The Tax Law Review.
A)Only statement III is correct.
B)Statements II and III are correct.
C)Only statement I is correct.
D)Statements I, II, and III are correct.
E)Statements I, II, III, and IV are correct.
Q3) When the Supreme Court grants a writ of certiorari,they are agreeing to review a lower court's decision.
A)True
B)False
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