Deck 17: an Introduction to Taxation

Question 1

A progressive tax rate structure is one where the rate of tax increases as the tax base increases.

Answer 1

True

Question 2

A proportional tax rate is one where the rate of the tax is the same for all taxpayers,regardless of income levels.

Answer 2

True

Question 3

The largest source of federal revenues is the corporate income tax.

Answer 3

False

Question 4

Which of the following taxes is progressive?

A)sales tax
B)excise tax
C)property tax
D)federal income tax

Question 5

Sarah contributes $25,000 to a church.Sarah's marginal tax rate is 35% while her average tax rate is 25%.After considering her tax savings,Sarah's contribution costs

A)$6,250.
B)$8,750.
C)$16,250.
D)$18,750.

Question 6

Arthur pays tax of $5,000 on taxable income of $50,000 while taxpayer Barbara pays tax of $12,000 on $120,000.The tax is a

A)progressive tax.
B)proportional tax.
C)regressive tax.
D)None of the above.

Question 7

The federal income tax is the dominant form of taxation by the federal government.

Question 8

Which of the following taxes is regressive?

A)Federal Insurance Contributions Act (FICA)
B)excise tax
C)property tax
D)gift tax

Question 9

The Sixteenth Amendment to the U.S.Constitution permits the passage of a federal income tax law.

Question 10

Regressive tax rates decrease as the tax base increases.

Question 11

When a change in the tax law is deemed necessary by Congress,the entire Internal Revenue Code must be revised.

Question 12

Until about 100 years ago,attempts to impose a federal income tax were ruled unconstitutional.The amendment to the U.S.Constitution allowing the imposition of a federal income tax is the

A)Second Amendment.
B)Thirteenth Amendment.
C)Sixteenth Amendment.
D)Nineteenth Amendment.

Question 13

The marginal tax rate is useful in tax planning because it measures the tax effect of a proposed transaction.

Question 14

If a taxpayer's total tax liability is $30,000,taxable income is $100,000,and economic income is $120,000,the average tax rate is 30 percent.

Question 15

The corporate tax rate is

A)progressive.
B)regressive.
C)proportional.
D)none of the above.

Question 16

Which of the following taxes is proportional?

A)gift tax
B)income tax
C)sales tax
D)Federal Insurance Contributions Act (FICA)

Question 17

The terms "progressive tax" and "flat tax" are synonymous.

Question 18

If a taxpayer's total tax liability is $4,000,taxable income is $20,000,and total economic income is $40,000,then the effective tax rate is 20 percent.

Question 19

A taxpayer's average tax rate is the tax rate applied to an incremental amount of taxable income that is added to the tax base.

Question 20

The largest source of revenues for the federal government comes from

A)individual income taxes.
B)corporate income taxes.
C)Social Security and Medicare taxes (FICA).
D)estate and gift taxes.

Question 21

Property transferred to the decedent's spouse is exempt from the estate tax because of the estate tax marital deduction provision.

Question 22

An individual will be subject to gift tax on gifts made to a charity greater than $15,000.

Question 23

The unified transfer tax system

A)imposes a single tax upon transfers of property during an individual's lifetime only.
B)imposes a single tax upon transfers of property during an individual's life and at death.
C)imposes a single tax upon transfers of property only at an individual's death.
D)none of above.

Question 24

While federal and state income taxes,as well as the federal gift and estate taxes,are generally progressive in nature,property taxes are proportional.

Question 25

Briana,who is single,has taxable income for 2019 of $90,000,resulting in a total tax of $15,775.Her total economic income is $100,000.Briana's average tax rate and effective tax rate are,respectively,

A)17.53% and 15.78%.
B)17.53% and 24%.
C)15.78% and 24%.
D)15.78% and 17.53%.

Question 26

Charlie makes the following gifts in the current year: $40,000 to his spouse,$30,000 to his church,$18,000 to his nephew,and $25,000 to a friend.Assuming Charlie does not elect gift splitting with his wife,his taxable gifts in the current year will be

A)$28,000.
B)$13,000.
C)$25,000.
D)$43,000.

Question 27

Eric dies in the current year and has a gross estate valued at $16,500,000.The estate incurs funeral and administrative expenses of $100,000 and also pays off Eric's debts which amount to $250,000.Eric bequeaths $600,000 to his wife.Eric made no taxable transfers during his life.Eric's taxable estate will be

A)$4,250,000.
B)$15,550,000.
C)$4,150,000.
D)$16,500,000.

Question 28

Charlotte pays $8,000 in tax deductible property taxes.Charlotte's marginal tax rate is 24%,effective tax rate is 20% and average rate is 22%.Charlotte's tax savings from paying the property tax is

A)$1,600.
B)$1,760.
C)$1,920.
D)$8,000.

Question 29

The primary liability for payment of the gift tax is imposed upon the donee.

Question 30

Property is generally included on an estate tax return at its historical cost basis.

Question 31

Helen,who is single,is considering purchasing a residence that will provide an $18,000 tax deduction for property taxes and mortgage interest.If her marginal tax rate is 24% and her effective tax rate is 20%,what is the amount of Helen's tax savings from purchasing the residence?

A)$3,600
B)$4,320
C)$3,200
D)$18,000

Question 32

The unified transfer tax system,comprised of the gift and estate taxes,is based upon the total property transfers an individual makes during lifetime and at death.

Question 33

All states impose a state income tax which is generally based on an individual's federal adjusted gross income (AGI)with minor adjustments.

Question 34

Gifts made during a taxpayer's lifetime may affect the amount of estate tax paid by the taxpayer's estate.

Question 35

Shaquille buys new cars for five of his friends.Each car cost $70,000.What is the amount of Shaquille's taxable gifts?

A)$0
B)$275,000
C)$335,000
D)$350,000

Question 36

In 2019,an estate is not taxable unless the sum of the taxable estate and taxable gifts made after 1976 exceeds

A)$4,505,800.
B)$10,000,000.
C)$5,000,000.
D)$11,400,000.

Question 37

For gift tax purposes,a $15,000 annual exclusion per donee is permitted.

Question 38

Paul makes the following property transfers in the current year: • $22,000 cash to his wife
• $34,000 cash to a qualified charity
• $220,000 house to his son
• $3,000 computer to an unrelated friend
The total of Paul's taxable gifts,assuming he does not elect gift splitting with his spouse,subject to the unified transfer tax is

A)$205,000.
B)$212,000.
C)$245,000.
D)$279,000.

Question 39

Gifts between spouses are generally exempt from transfer taxes.

Question 40

When property is transferred,the gift tax is based on

A)replacement cost of the transferred property.
B)fair market value on the date of transfer.
C)the transferor's original cost of the transferred property.
D)the transferor's depreciated cost of the transferred property.

Question 41

Martha is self-employed in 2019.Her self employment income is $140,000.What is her self-employment tax?

A)$20,334
B)$20,540
C)$21,420
D)None of the above

Question 42

The various entities in the federal income tax system may be classified into two general categories,taxpaying entities (such as individuals and C [regular] corporations)and flow-through entities such as sole proprietorships,partnerships,S corporations,and limited liability companies.

Question 43

The primary objective of the federal income tax law is to achieve various economic and social policy objectives.

Question 44

Jillian,a single individual,earns $230,000 in 2019 through her job as an accounting manager.What is her FICA tax?

A)$11,845
B)$11,575
C)$17,595
D)$10,167

Question 45

Vincent makes the following gifts during 2019:
$15,000 cash gift to wife
Gift of automobile valued at $35,000 to his adult son
Gift of golf clubs valued at $5,000 to a friend
$10,000 contribution to church
Although he is married,none of the gifts are considered joint gifts with his wife.What are the total taxable gifts subject to the unified transfer tax?

Question 46

Horizontal equity means that

A)taxpayers with the same amount of income should pay the same amount of tax.
B)taxpayers with larger amounts of income should pay more tax than taxpayers with lower amounts of income.
C)all taxpayers should pay the same tax.
D)None of the above.

Question 47

Jeffery died in 2019 leaving a $16,000,000 gross estate.Six months after his death,the gross assets are valued at $16,100,000.In years prior to 2019 (but after 1976),Jeffery had made taxable gifts of $300,000.Of the $16,000,000 gross estate,estate assets valued at $3 million were transferred to his wife and $100,000 was used to pay administrative and funeral expenses.Jeffery had debts of $200,000 which were paid by the estate,and the remainder of the estate was transferred to his children.
a.What is the amount of Jeffery's taxable estate?
b.What is the tax base for computing Jeffery's estate?
c.What is the amount of estate tax owed if the unified credit is $4,505,800?
d.Alternatively,if six months after his death,the gross assets in Jeffery's estate declined in value to $15,000,000,can the administrator of Jeffery's estate elect the alternate valuation date?

Question 48

Adam Smith's canons of taxation are equity,certainty,convenience,and economy.

Question 49

Jose dies in the current year and has a gross estate valued at $13,000,000 in 2019.Over the past ten years,Jose had made taxable gifts of $400,000.The estate incurs funeral and administrative expenses of $100,000 and also pays off Jose's debts which amount to $300,000.Jose bequeaths $500,000 to his wife.What is the amount of Jose's tax base,the amount on which the estate tax is computed?

A)$12,100,000
B)$12,500,000
C)$700,000
D)$1,100,000

Question 50

Organizing a corporation as an S Corporation results in a single level of taxation.

Question 51

Vertical equity means that

A)taxpayers with the same amount of income should pay the same amount of tax.
B)taxpayers with larger amounts of income should pay more tax than taxpayers with lower amounts of income.
C)all taxpayers should pay the same tax.
D)None of the above.

Question 52

Which of the following is not an objective of the federal income tax law?

A)Stimulate private investment.
B)Redistribution of wealth.
C)Encourage research and development activities.
D)Prevent taxpayers from paying a higher percentage of their income in personal income taxes due to inflation.

Question 53

Individuals are the principal taxpaying entities in the federal income tax system.

Question 54

Which of the following is not a social objective of the tax law?

A)prohibition of a deduction for illegal bribes,fines and penalties
B)a deduction for charitable contributions
C)an exclusion for interest earned by large businesses
D)creation of tax-favored pension plans

Question 55

Which of the following is not one of Adam Smith's canons of taxation?

A)equity
B)convenience
C)certainty
D)economic stimulation

Question 56

Dividends paid from most U.S.corporations are taxed at the same rate as the recipients' salaries and wages.

Question 57

Flow-through entities do not have to file tax returns since they are not taxable entities.

Question 58

Kole earns $140,000 in 2019 in his job as a sales manager.What is his FICA tax?

A)$10,270
B)$8,240
C)$10,710
D)$10,167

Question 59

Which of the following statements is incorrect?

A)Property taxes are levied on real estate.
B)Excise taxes are assessed on items such as gasoline and telephone use.
C)Gift taxes are imposed on the recipient of a gift.
D)The estate tax is based on the fair market value of property at death or the alternate valuation date.

Question 60

In a limited liability partnership,a partner is not liable for his partner's acts of negligence or misconduct.

Question 61

Generally,tax legislation is introduced first in the Senate and referred to the Senate Finance Committee.

Question 62

Signal Corporation is an S corporation owned equally by Serena and three other shareholders.The corporation reported $900,000 of business receipts,$500,000 of business deductions and $40,000 of dividend income.On Serena's return,she will be entitled to a deduction for qualified business income of

A)$20,000.
B)$22,000.
C)$80,000.
D)$88,000.

Question 63

Which of the following serves as the highest authority for tax research,planning,and compliance activities?

A)Internal Revenue Code
B)Income Tax Regulations
C)Revenue Rulings
D)Revenue Procedures

Question 64

All of the following are executive (administrative)sources of tax law except

A)Internal Revenue Code.
B)Income Tax Regulations.
C)Revenue Rulings.
D)Revenue Procedures.

Question 65

Firefly Corporation is a C corporation.Freya owns all of the stock.During the current year Firefly earned taxable income of $500,000 and paid a $300,000 dividend to Freya.Which of the following statements is correct?

A)Firefly will pay corporate income tax on its earnings,and Freya will pay individual income tax on the dividends.
B)Only Firefly will pay taxes.Freya will not pay any taxes due to her holdings in Firefly.
C)Firefly's income will flow through to Freya's tax return,and she will pay the taxes on the $500,000 of corporate income.
D)Firefly will not pay any taxes,but Freya will pay taxes on the dividend received.

Question 66

The tax law encompasses administrative and judicial interpretations,such as Treasury regulations,revenue rulings,revenue procedures,and court decisions,as well as statutes.

Question 67

The term "tax law" includes

A)Internal Revenue Code.
B)Treasury Regulations.
C)judicial decisions.
D)All of the above.

Question 68

In an S corporation,shareholders

A)are taxed on their proportionate share of earnings.
B)are taxed only on dividends.
C)may allocate income among themselves in order to consider special contributions.
D)are only taxed on salaries.

Question 69

Rocky and Charlie form RC Partnership as equal partners.Rocky contributes $100,000 into RC while Charlie contributes real estate with a cost and fair market value of $100,000.During the current year,RC earned net income of $600,000.The partnership distributes $200,000 to each partner.The amount that Rocky should report on his individual tax return is

A)$0.
B)$100,000.
C)$200,000.
D)$300,000.

Question 70

AB Partnership earns $500,000 in the current year.Partners A and B are equal partners who do not receive any distributions during the year.How much income does partner A report from the partnership?

A)$0
B)$250,000
C)$500,000
D)None of the above

Question 71

Brad and Angie had the following income and deductions during 2098:
Salaries $110,000
Interest income 10,000
Itemized deductions 26,000
Taxes withheld during year 12,000
Calculate Brad and Angie's tax liability due or refund.They file a joint tax return.

Question 72

Fireball Corporation is an S corporation.Leyla owns all of the stock.During the current year,Fireball earned taxable income of $500,000 and paid a $300,000 distribution to Leyla.Which of the following statements is correct?

A)Fireball will pay corporate income tax on its earnings,and Leyla will pay individual income tax on the distribution.
B)Only Fireball will pay taxes.Leyla will not pay any taxes due to her holdings in Fireball.
C)Fireball's income will flow through to Leyla's tax return,and she will pay the taxes on the $500,000 of corporate income.
D)Fireball will not pay any taxes,but Leyla will pay taxes on the distribution received.

Question 73

Limited liability companies may elect to be taxed as corporations.

Question 74

Which of the following is not a taxpaying entity?

A)C corporation
B)partnership
C)individual
D)All of the above are taxpayers.

Question 75

Limited liability company members (owners)are responsible for the liabilities of their limited liability company.

Question 76

Which of the following is not an advantage of a limited liability company (LLC)?

A)limited liability for all members of a LLC
B)ability to choose between taxation as a partnership or corporation
C)default tax treatment as a corporation,unless otherwise elected
D)All of the above are advantages of an LLC.

Question 77

All of the following are classified as flow-through entities for tax purposes except

A)partnerships.
B)C corporations.
C)S corporations.
D)limited liability companies.

Question 78

Tercot Partnership reported $1,000,000 of business receipts,$700,000 of business deductions,and $100,000 of interest income.Terry is a 50% partner in Tercot Partnership.On Terry's return,she will be entitled to a deduction for qualified business income of

A)$60,000.
B)$80,000.
C)$40,000.
D)$30,000.

Question 79

What is an important aspect of a limited liability partnership?

A)It is the same as a limited partnership where the general partner has unlimited liability.
B)A partner has unlimited liability arising from his or her own acts of negligence or misconduct or similar acts of any person under his or her direct supervision,but does not have unlimited liability in other matters.
C)All partners have limited liability regarding all partnership activities.
D)All partners have unlimited liability.

Question 80

All of the following statements are true except

A)the net income earned by a sole proprietorship is reported on the owner's individual income tax return.
B)the net income of an S corporation is subject to double taxation because it is taxed at the entity level and dividends paid from the S corporation to individual shareholders are also taxed.
C)the net income of C corporation is subject to double taxation because it is taxed at the entity level and dividends paid from the C corporation to individual shareholders is also taxed.
D)LLCs are generally taxed as partnerships.