Deck 1: Introduction to Taxation

Question 1

A Federal excise tax is no longer imposed on admission to theaters.

Answer 1

True

Question 2

Currently,the Federal income tax is less progressive than it ever has been in the past.

Answer 2

False

Question 3

The Federal estate and gift taxes are examples of progressive taxes.

Answer 3

True

Question 4

On transfers by death,the Federal government relies on an estate tax,while states impose an estate tax,an inheritance tax,both taxes,or neither tax.

Question 5

Sales made by mail order are not exempt from the application of a general sales (or use)tax.

Question 6

Like the Federal counterpart,the amount of the state excise taxes on gasoline varies from state to state.

Question 7

A parent employs his twin daughters,age 17,in his sole proprietorship.The daughters are not subject to FICA coverage.

Question 8

An inheritance tax is a tax on a decedent's right to pass property at death.

Question 9

The principal objective of the FUTA tax is to provide some measure of retirement security.

Question 10

The Federal gas-guzzler tax applies only to automobiles manufactured overseas and imported into the U.S.

Question 11

The Federal excise tax on cigarettes is an example of a proportional tax.

Question 12

Currently,the tax base for the Social Security component of the FICA is not limited to a dollar amount.

Question 13

The FICA tax (Medicare component)on wages is progressive since the tax due increases as wages increase.

Question 14

There is a Federal excise tax on hotel occupancy.

Question 15

Not all of the states that impose a general sales tax also have a use tax.

Question 16

A safe and easy way for a taxpayer to avoid local and state sales taxes is to make the purchase in a state that levies no such taxes.

Question 17

Unlike FICA,FUTA requires that employers comply with state as well as Federal rules.

Question 18

States impose either a state income tax or a general sales tax,but not both types of taxes.

Question 19

Two persons who live in the same state but in different counties may not be subject to the same general sales tax rate.

Question 20

One of the major reasons for the enactment of the Federal estate tax was to prevent large amounts of wealth from being accumulated within the family unit.

Question 21

The ad valorem tax on personal use personalty is more often avoided by taxpayers than the ad valorem tax on business use personalty.

Question 22

Jake,the sole shareholder of Peach Corporation,a C corporation,has the corporation pay him $100,000.For tax purposes,Jake would prefer to have the payment treated as dividend instead of salary.

Question 23

Carol and Candace are equal partners in Peach Partnership.In the current year,Peach had a net profit of $75,000 ($250,000 gross income - $175,000 operating expenses)and distributed $25,000 to each partner.Peach must pay tax on $75,000 of income.

Question 24

A fixture will be subject to the ad valorem tax on personalty rather than the ad valorem tax on realty.

Question 25

Don,the sole shareholder of Pastel Corporation (a C corporation),has the corporation pay him a salary of $600,000 in the current year.The Tax Court has held that $200,000 represents unreasonable compensation.Don must report a salary of $400,000 and a dividend of $200,000 on his individual tax return.

Question 26

Under the usual state inheritance tax,two heirs,a cousin and a son of the deceased,would not be taxed at the same rate.

Question 27

In 2012,José,a widower,sells land (fair market value of $100,000)to his daughter,Linda,for $50,000.José has made a taxable gift of $50,000.

Question 28

Rajib is the sole shareholder of Robin Corporation,a calendar year S corporation.Robin earned net profit of $350,000 ($520,000 gross income - $170,000 operating expenses)and distributed $80,000 to Rajib.Rajib must report Robin Corporation profit of $350,000 on his Federal income tax return.

Question 29

Double taxation of corporate income results because dividend distributions are included in a shareholder's gross income but are not deductible by the corporation.

Question 30

Julius,a married taxpayer,makes gifts to each of his six children.A maximum of twelve annual exclusions could be allowed as to these gifts.

Question 31

Mona inherits her mother's personal residence,which she converts to a furnished rent house.These changes should affect the amount of ad valorem property taxes levied on the properties.

Question 32

Under Clint's will,all of his property passes to either the Lutheran Church or to his wife.No Federal estate tax will be due on Clint's death in 2013.

Question 33

The annual exclusion,currently $14,000,is available for gift and estate tax purposes.

Question 34

Quail Corporation is a C corporation with net income of $125,000 during the current year.If Quail paid dividends of $25,000 to its shareholders,the corporation must pay tax on $100,000 of net income.Shareholders must report the $25,000 of dividends as income.

Question 35

Even if property tax rates are not changed,the amount of ad valorem taxes imposed on realty may not remain the same.

Question 36

Eagle Company,a partnership,had a short-term capital loss of $10,000 during the year.Aaron,who owns 25% of Eagle,will report $2,500 of Eagle's short-term capital loss on his individual tax return.

Question 37

Donald owns a 45% interest in a partnership that earned $130,000 in the current year.He also owns 45% of the stock in a C corporation that earned $130,000 during the year.Donald received $20,000 in distributions from each of the two entities during the year.With respect to this information,Donald must report $78,500 of income on his individual income tax return for the year.

Question 38

The formula for the Federal income tax on corporations is the same as that applicable to individuals.

Question 39

Tomas owns a sole proprietorship,and Lucy is the sole shareholder of a C corporation.In the current year both businesses make a net profit of $60,000.Neither business distributes any funds to the owners in the year.For the current year,Tomas must report $60,000 of income on his individual tax return,but Lucy is not required to report any income from the corporation on her individual tax return.

Question 40

One of the motivations for making a gift is to save on income taxes.

Question 41

Various tax provisions encourage the creation of certain types of retirement plans.Such provisions can be justified on both economic and social grounds.

Question 42

A tax cut enacted by Congress that contains a sunset provision will make the tax cut temporary.

Question 43

Taxes levied by both states and the Federal government include:

A)General sales tax.
B)Custom duties.
C)Hotel occupancy tax.
D)Franchise tax.
E)None of the above.

Question 44

To mitigate the effect of the annual accounting period concept,the tax law permits the carryforward to other years of the excess charitable contributions of a particular year.

Question 45

The tax law provides various tax credits,deductions,and exclusions that are designed to encourage taxpayers to obtain additional education.These provisions can be justified on both economic and equity grounds.

Question 46

A characteristic of FUTA is that:

A)It is imposed on both employer and employee.
B)It is imposed solely on the employee.
C)Compliance requires following guidelines issued by both state and Federal regulatory authorities.
D)It is applicable to spouses of employees but not to any children under age 18.
E)None of the above.

Question 47

Taxes levied by all states include:

A)Tobacco excise tax.
B)Individual income tax.
C)Inheritance tax.
D)General sales tax.
E)None of the above.

Question 48

As a matter of administrative convenience,the IRS would prefer to have Congress decrease (rather than increase)the amount of the standard deduction allowed to individual taxpayers.

Question 49

Property can be transferred within the family group by gift or at death.One motivation for preferring the gift approach is:

A)To take advantage of the higher unified transfer tax credit available under the gift tax.
B)To avoid a future decline in value of the property transferred.
C)To take advantage of the per donee annual exclusion.
D)To shift income to higher bracket donees.
E)None of the above.

Question 50

Which,if any,of the following transactions will increase a taxing jurisdiction's revenue from the ad valorem tax imposed on real estate?

A)A resident dies and leaves his farm to his church.
B)A large property owner issues a conservation easement as to some of her land.
C)A tax holiday issued 10 years ago has expired.
D)A bankrupt motel is acquired by the Red Cross and is to be used to provide housing for homeless persons.
E)None of the above.

Question 51

Taxes not imposed by the Federal government include:

A)Tobacco excise tax.
B)Customs duties (tariffs on imports).
C)Tax on rent cars.
D)Gas guzzler tax.
E)None of the above.

Question 52

Burt and Lisa are married and live in a common law state.Burt wants to make gifts to their four children in 2013.What is the maximum amount of the annual exclusion they will be allowed for these gifts?

A)$14,000.
B)$28,000.
C)$56,000.
D)$112,000.
E)None of the above.

Question 53

A use tax is imposed by:

A)The Federal government and all states.
B)The Federal government and a majority of the states.
C)All states and not the Federal government.
D)Most of the states and not the Federal government.
E)None of the above.

Question 54

When Congress enacts a tax cut that is phased in over a period of years,revenue neutrality is achieved.

Question 55

Federal excise taxes that are no longer imposed include:

A)Tax on air travel.
B)Tax on wagering.
C)Tax on the manufacture of sporting equipment.
D)Tax on alcohol.
E)None of the above.

Question 56

To lessen,or eliminate,the effect of multiple taxation,a taxpayer who is subject to both foreign and U.S.income taxes on the same income is allowed either a deduction or a credit for the foreign tax paid.

Question 57

A provision in the law that compels accrual basis taxpayers to pay a tax on prepaid income in the year received and not when earned is consistent with generally accepted accounting principles.

Question 58

As it is consistent with the wherewithal to pay concept,the tax law requires a seller to recognize gain in the year the installment sale occurs.

Question 59

A characteristic of FICA is that:

A)It does not apply when one spouse works for the other spouse.
B)It is imposed only on the employer.
C)It provides a modest source of income in the event of loss of employment.
D)It is administered by both state and Federal governments.
E)None of the above.

Question 60

Jason's business warehouse is destroyed by fire.As the insurance proceeds exceed the basis of the property,a gain results.If Jason shortly reinvests the proceeds in a new warehouse,no gain is recognized due to the application of the wherewithal to pay concept.

Question 61

Juanita owns 60% of the stock in a C corporation that had a profit of $200,000 in 2013.Carlos owns a 60% interest in a partnership that had a profit of $200,000 during the year.The corporation distributed $45,000 to Juanita,and the partnership distributed $45,000 to Carlos.Which of the following statements relating to 2013 is incorrect?

A)Juanita must report $120,000 of income from the corporation.
B)The corporation must pay corporate tax on $200,000 of income.
C)Carlos must report $120,000 of income from the partnership.
D)The partnership is not subject to a Federal entity-level income tax.
E)None of the above.

Question 62

Bjorn owns a 60% interest in an S corporation that earned $150,000 in 2013.He also owns 60% of the stock in a C corporation that earned $150,000 during the year.The S corporation distributed $30,000 to Bjorn and the C corporation paid dividends of $30,000 to Bjorn.How much income must Bjorn report from these businesses?

A)$0 income from the S corporation and $30,000 income from the C corporation.
B)$30,000 income from the S corporation and $30,000 of dividend income from the C corporation.
C)$90,000 income from the S corporation and $0 income from the C corporation.
D)$90,000 income from the S corporation and $30,000 income from the C corporation.
E)None of the above.

Question 63

Rachel is the sole member of an LLC,and Jordan is the sole shareholder of a C corporation.Both businesses were started in the current year,and each business has a long-term capital gain of $10,000 for the year.Neither business made any distributions during the year.With respect to this information,which of the following statements is correct?

A)The C corporation receives a preferential tax rate on the LTCG of $10,000.
B)The LLC must pay corporate tax on taxable income of $10,000.
C)Jordan must report $10,000 of LTCG on his tax return.
D)Rachel must report $10,000 of LTCG on her tax return.
E)None of the above.

Question 64

Norma formed Hyacinth Enterprises,a proprietorship,in 2013.In its first year,Hyacinth had operating income of $400,000 and operating expenses of $240,000.In addition,Hyacinth had a long-term capital loss of $10,000.Norma,the proprietor of Hyacinth Enterprises,withdrew $75,000 from Hyacinth during the year.Assuming Norma has no other capital gains or losses,how does this information affect her taxable income for 2013?

A)Increases Norma's taxable income by $157,000 ($160,000 ordinary business income - $3,000 long-term capital loss).
B)Increases Norma's taxable income by $150,000 ($160,000 ordinary business income - $10,000 long-term capital loss).
C)Increases Norma's taxable income by $75,000.
D)Increases Norma's taxable income by $160,000.
E)None of the above.

Question 65

Allowing a domestic production activities deduction for certain manufacturing income can be justified:

A)As mitigating the effect of the annual accounting period concept.
B)As promoting administrative feasibility.
C)By economic considerations.
D)Based on the wherewithal to pay concept.
E)None of the above.

Question 66

Indicate which,if any,statement is incorrect.State income taxes:

A)Can piggyback to the Federal version.
B)Cannot apply to visiting nonresidents.
C)Can decouple from the Federal version.
D)Can provide occasional amnesty programs.
E)None of the above.

Question 67

Pablo,a sole proprietor,sold stock held as an investment for a $40,000 long-term capital gain.Pablo's marginal tax rate is 33%.Loon Corporation,a C corporation,sold stock held as an investment for a $40,000 long-term capital gain.Loon's marginal tax rate is 35%.What tax rates are applicable to these capital gains?

A)15% rate applies to Pablo and 35% rate applies to Loon.
B)15% rate applies to Loon and 33% rate applies to Pablo.
C)35% rate applies to Loon and 33% rate applies to Pablo.
D)15% rate applies to both Pablo and Loon.
E)None of the above.

Question 68

Provisions in the tax law that promote energy conservation and more use of alternative (non-fossil)fuels can be justified by:

A)Political considerations.
B)Economic and social considerations.
C)Promoting administrative feasibility.
D)Encouragement of small business.
E)None of the above.

Question 69

Lucinda is a 60% shareholder in Rhea Corporation,a calendar year S corporation.During the year,Rhea Corporation had gross income of $550,000 and operating expenses of $380,000.In addition,the corporation sold land that had been held for investment purposes for a short-term capital gain of $30,000.During the year,Rhea Corporation distributed $50,000 to Lucinda.With respect to this information,which of the following statements is correct?

A)Rhea Corporation will pay tax on taxable income of $200,000.
B)Lucinda reports ordinary income of $50,000.
C)Lucinda reports ordinary income of $120,000.
D)Lucinda reports ordinary income of $102,000 and a short-term capital gain of $18,000.
E)None of the above.

Question 70

Social considerations can be used to justify:

A)Allowance of a credit for child care expenses.
B)Allowing excess capital losses to be carried over to other years.
C)Allowing accelerated amortization for the cost of installing pollution control facilities.
D)Allowing a Federal income tax deduction for state and local sales taxes.
E)None of the above.

Question 71

Elk,a C corporation,has $370,000 operating income and $290,000 operating expenses during the year.In addition,Elk has a $10,000 long-term capital gain and a $17,000 short-term capital loss.Elk's taxable income is:

A)$63,000.
B)$73,000.
C)$80,000.
D)$90,000.
E)None of the above.

Question 72

Which of the following statements is incorrect about LLCs and the check-the-box Regulations?

A)If a limited liability company with more than one owner does not make an election,the entity is taxed as a corporation.
B)All 50 states have passed laws that allow LLCs.
C)An entity with more than one owner and formed as a corporation cannot elect to be taxed as a partnership.
D)If a limited liability company with one owner does not make an election,the entity is taxed as a sole proprietorship.
E)A limited liability company with one owner can elect to be taxed as a corporation.

Question 73

Which,if any,of the following is a typical characteristic of an ad valorem tax on personalty?

A)Taxpayer compliance is greater for personal use property than for business use property.
B)The tax on automobiles sometimes considers the age of the vehicle.
C)Most states impose a tax on intangibles.
D)The tax on intangibles generates considerable revenue since it is difficult for taxpayers to avoid.
E)None of the above.

Question 74

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.

Question 75

State income taxes generally can be characterized by:

A)The same date for filing as the Federal income tax.
B)No provision for withholding procedures.
C)Allowance of a deduction for Federal income taxes paid.
D)Applying only to individuals and not applying to corporations.
E)None of the above.

Question 76

Flycatcher Corporation,a C corporation,has two equal individual shareholders,Nancy and Pasqual.In the current year,Flycatcher earned $100,000 net profit and paid a dividend of $10,000 to each shareholder.Regardless of any tax consequences resulting from their interests in Flycatcher,Nancy is in the 33% marginal tax bracket and Pasqual is in the 15% marginal tax bracket.With respect to the current year,which of the following statements is incorrect?

A)Flycatcher cannot avoid the corporate tax altogether by paying out all $100,000 of net profit as dividends to the shareholders.
B)Nancy incurs income tax of $1,500 on her dividend income.
C)Pasqual incurs income tax of $1,500 on his dividend income.
D)Flycatcher pays corporate tax of $22,250.
E)None of the above.

Question 77

Which,if any,of the following provisions cannot be justified as mitigating the effect of the annual accounting period concept?

A)Nonrecognition of gain allowed for involuntary conversions.
B)Net operating loss carryback and carryover provisions.
C)Carry over of excess charitable contributions.
D)Use of the installment method to recognize gain.
E)Carry over of excess capital losses.

Question 78

Several years ago,Logan purchased extra grazing land for his ranch at a cost of $240,000.In 2013,the land is condemned by the state for development as a highway maintenance depot.Under the condemnation award,Logan receives $600,000 for the land.Within the same year,he replaces the property with other grazing land.What is Logan's tax situation if the replacement land cost:
$\begin{array}{ll}\text { a. } & \$ 210,000 ? \\\text { b. } & \$ 360,000 ? \\\text { c. } & \$ 630,000 ? \\\text { d. } & \text { Why? }\end{array}$

Question 79

Which,if any,of the following transactions will decrease a taxing jurisdiction's ad valorem tax revenue imposed on real estate?

A)A tax holiday is granted to an out-of-state business that is searching for a new factory site.
B)An abandoned church is converted to a restaurant.
C)A public school is razed and turned into a city park.
D)A local university sells a dormitory that will be converted for use as an apartment building.
E)None of the above.

Question 80

Both economic and social considerations can be used to justify:

A)Favorable tax treatment for accident and health plans provided for employees and financed by employers.
B)Disallowance of any deduction for expenditures deemed to be contrary to public policy (e.g.,fines,penalties,illegal kickbacks,bribes to government officials).
C)Various tax credits,deductions,and exclusions that are designed to encourage taxpayers to obtain additional education.
D)Allowance of a deduction for state and local income taxes paid.
E)None of the above.