south-western federal taxation 2014 individual income taxes, 37th edition

7/21/2019 South-Western Federal Taxation 2014 Individual Income Taxes, 37th Edition

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1. The rat i f i cat i on of t he Si xteent h Amendment t o the U. S. Const i t ut i onwas necessary t o val i dat e the Feder al i ncome t ax on cor porat i ons.

a. Tr ue*b. Fal se

2. Bef or e t he Si xt eent h Amendment t o t he Const i t ut i on was r at i f i ed,t her e was no val i d Feder al i ncome t ax on i ndi vi dual s.

a. Tr ue*b. Fal se

3. The f i r st i ncome t ax on i ndi vi dual s (af t er t he r at i f i cat i on of t heSi xteent h Amendment t o the Const i t ut i on) l evi ed tax r at es f r om a l ow of2% t o a hi gh of 6%.

*a. Tr ueb. Fal se

4. The Federal i ncome t ax on i ndi vi dual s gener ates more revenue t hant he Feder al i ncome t ax on cor porat i ons.

*a. Tr ueb. Fal se

5. The pay- as- you- go f eatur e of t he Feder al i ncome t ax on i ndi vi dual s

conf or ms t o AdamSmi t h s canon of cer t ai nt y.

a. Tr ue*b. Fal se

6. Because the l aw i s compl i cat ed, most i ndi vi dual t axpayer s are notabl e t o compl et e t hei r Feder al i ncome t ax ret ur ns wi t hout out si deassi st ance.

*a. Tr ueb. Fal se

7. The FI CA t ax ( Medi car e component ) on wages i sprogressive si nce t het ax due i ncr eases as wages i ncr ease.

a. Tr ue*b. Fal se

8. The Federal est at e and gi f t t axes ar e exampl es of progressive t axes.


2/710

*a. Tr ueb. Fal se

9. The Federal exci se tax on ci garet t es i s an exampl e of aproportionalt ax.

*a. Tr ueb. Fal se

10. Cur r ent l y, t he Feder al i ncome t ax i s l essprogressive t han i t everhas been i n the past .

a. Tr ue*b. Fal se

11. Mona i nheri t s her mother s per sonal r esi dence, whi ch she conver t st o a f ur ni shed r ent house. These changes shoul d af f ect t he amount of advalorem pr oper t y t axes l evi ed on t he pr oper t i es.

*a. Tr ueb. Fal se

12. A fixture wi l l be subj ect t o t he ad valorem t ax onpersonaltyr at her t han t he ad valorem t ax on realty.

a. Tr ue*b. Fal se

13. Even i f propert y t ax r ates ar e not changed, t he amount of advalorem t axes i mposed on r eal t y may not r emai n t he same.

*a. Tr ueb. Fal se

14. The ad valorem t ax on personal use personal t y i s more of t en avoi ded

by t axpayers t han t he ad valorem t ax on busi ness use per sonal t y.

*a. Tr ueb. Fal se

15. A Feder al exci se t ax i s no l onger i mposed on admi ssi on t o theaters .

*a. Tr ueb. Fal se


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16. Ther e i s a Feder al exci se t ax on hotel occupancy.

a. Tr ue*b. Fal se

17. The Feder al gas- guzzl er t ax appl i es onl y t o aut omobi l esmanuf actured overseas and i mport ed i nto t he U. S.

a. Tr ue*b. Fal se

18. Li ke t he Federal count er par t , t he amount of t he st ate exci se t axeson gasol i ne var i es f r om st at e t o st at e.

a. Tr ue*b. Fal se

19. Not al l of t he stat es t hat i mpose a gener al sal es t ax al so have ause t ax.

a. Tr ue*b. Fal se

20. Sal es made by mai l order ar e not exempt f r om t he appl i cat i on of agener al sal es ( or use) t ax.

*a. Tr ueb. Fal se

21. Two per sons who l i ve i n t he same st at e but i n di f f erent count i esmay not be subj ect t o the same general sal es t ax r ate.

*a. Tr ueb. Fal se

22. St at es i mpose ei t her a st at e i ncome t ax or a gener al sal es t ax, butnot bot h t ypes of t axes.

a. Tr ue*b. Fal se

23. A saf e and easy way f or a taxpayer t o avoi d l ocal and st ate sal est axes i s t o make t he pur chase i n a st at e t hat l evi es no such t axes.


4/710

a. Tr ue*b. Fal se

24. On t r ansf er s by deat h, t he Federal gover nment r el i es on an est at et ax, whi l e st at es i mpose an est at e t ax, an i nher i t ance t ax, bot h t axes,or nei t her t ax.

*a. Tr ueb. Fal se

25. An i nher i t ance t ax i s a t ax on a decedent s r i ght t o pass pr oper t yat deat h.

a. Tr ue*b. Fal se

26. One of t he maj or r easons f or t he enactment of t he Federal est atet ax was t o pr event l arge amount s of weal t h f r om bei ng accumul atedwi t hi n t he f ami l y uni t .

*a. Tr ueb. Fal se

27. Under Cl i nt s wi l l , al l of hi s pr oper t y passes t o ei t her t heLut her an Chur ch or t o hi s wi f e. No Federal est at e t ax wi l l be due on

Cl i nt s deat h i n 2013.

*a. Tr ueb. Fal se

28. Under t he usual st at e i nher i t ance t ax, t wo hei r s, a cousi n and ason of t he deceased, woul d not be t axed at t he same rate.

*a. Tr ueb. Fal se

29. The annual excl usi on, cur r ent l y $14, 000, i s avai l abl e f or gi f t andest at e t ax pur poses.

a. Tr ue*b. Fal se


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30. I n 2012, J os, a wi dower , sel l s l and ( f ai r mar ket val ue of $100, 000)t o hi s daught er , Li nda, f or $50, 000. J os has made a t axabl e gi f t of$50, 000.

a. Tr ue*b. Fal se

31. J ul i us, a mar r i ed t axpayer , makes gi f t s t o each of hi s si x chi l dr en.A maxi mum of t wel ve annual excl usi ons coul d be al l owed as t o t hesegi f t s.

*a. Tr ueb. Fal se

32. One of t he mot i vat i ons f or maki ng a gi f t i s t o save on i ncome taxes.

*a. Tr ueb. Fal se

33. The f ormul a f or t he Federal i ncome t ax on corpor at i ons i s t he sameas that appl i cabl e t o i ndi vi dual s.

a. Tr ue*b. Fal se

34. A st ate i ncome t ax can be i mposed on nonresident t axpayer s who earn

i ncome wi t hi n the st at e or on an i t i ner ant basi s.

*a. Tr ueb. Fal se

35. For st at e i ncome t ax pur poses, a maj or i t y of st at es al l ow adeduct i on f or Feder al i ncome t axes.

a. Tr ue*b. Fal se

36. Some st ates use t hei r st ate i ncome t ax r eturn as a means ofcol l ect i ng unpai d sal es and use t axes.

*a. Tr ueb. Fal se

37. No st at e has of f ered an i ncome t ax amnest y progr am more t han once.


6/710

a. Tr ue*b. Fal se

38. For Feder al i ncome t ax pur poses, t her e never has been a generalamnest y per i od.

*a. Tr ueb. Fal se

39. Under st ate amnest y progr ams, al l del i nquent and unpai d i ncomet axes ar e f or gi ven.

a. Tr ue*b. Fal se

40. When a st at e decoupl es f r om a Feder al t ax pr ovi si on, i t means t hatt hi s provi s i on wi l l not appl y f or s t ate i ncome t ax pur poses.

*a. Tr ueb. Fal se

41. The pr i nci pal obj ect i ve of t he FUTA t ax i s t o pr ovi de some measur eof r et i r ement secur i t y.

a. Tr ue*b. Fal se

42. Cur r ent l y, t he tax base f or t he Soci al Secur i t y component of t heFI CA i s not l i mi t ed t o a dol l ar amount .

a. Tr ue*b. Fal se

43. A par ent empl oys hi s t wi n daught ers , age 17, i n hi s sol epr opr i et or shi p. The daught er s are not subj ect t o FI CA cover age.

*a. Tr ueb. Fal se

44. Unl i ke FI CA, FUTA r equi r es t hat empl oyer s compl y wi t h st ate as wel las Feder al r ul es.

*a. Tr ueb. Fal se


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45. A maj or advant age of a f l at t ax t ype of i ncome tax i s i t ss i mpl i ci t y.

*a. Tr ueb. Fal se

46. The val ue added tax (VAT) has not had wi de accept ance i n thei nt er nat i onal communi t y.

a. Tr ue*b. Fal se

47. I f mor e I RS audi t s ar e pr oduci ng a gr eat er number of no changer esul t s, t hi s i ndi cat es i ncreased compl i ance on t he par t of t axpayer s.

a. Tr ue*b. Fal se

48. The amount of a t axpayer s i t emi zed deduct i ons will i ncrease t hechance of bei ng audi t ed by t he I RS.

*a. Tr ueb. Fal se

49. I n an of f i ce audi t , t he audi t by t he I RS t akes pl ace at t he of f i ceof t he t axpayer .

a. Tr ue*b. Fal se

50. The I RS agent audi t i ng t he r etur n will i ssue an RAR even i f t het axpayer owes no addi t i onal t axes.

*a. Tr ueb. Fal se

51. I f a speci al agent becomes i nvol ved i n t he audi t of a r et ur n,t hi s i ndi cat es t hat t he I RS suspect s t hat f r aud i s i nvol ved.

*a. Tr ueb. Fal se


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52. I f a t axpayer f i l es ear l y ( i . e. , bef or e t he due dat e of t he r et ur n) ,t he st at ut e of l i mi t at i ons on assessment s begi ns on t he dat e t he r et ur ni s f i l ed.

a. Tr ue*b. Fal se

53. For omi ssi ons f r om gr oss i ncome i n excess of 25% of t hat r epor t ed,t her e i s no st at ut e of l i mi t at i ons on addi t i onal i ncome t ax assessment sby t he I RS.

a. Tr ue*b. Fal se

54. I f an i ncome t ax ret ur n i s not f i l ed by a t axpayer , t her e i s nost at ut e of l i mi t at i ons on assessment s of t ax by the I RS.

*a. Tr ueb. Fal se

55. I f f r aud i s i nvol ved, t her e i s no ti me l i mi t on t he assessment of adef i ci ency by t he I RS.

*a. Tr ueb. Fal se

56. The I RS i s r equi r ed t o r edet er mi ne t he i nt er est r at e onunder payments and over payments once a year .

a. Tr ue*b. Fal se

57. A cal endar year t axpayer f i l es hi s 2012 Federal i ncome t ax r et ur non March 5, 2013. The return ref l ects an over payment of $6, 000, and t het axpayer r equest s a ref und of t hi s amount . The r ef und i s pai d on May 17,2013. The r ef und need not i ncl ude i nt er est .

*a. Tr ueb. Fal se

58. For i ndi vi dual t axpayer s, t he i nt er est r at e f or i ncome tax r ef unds( over payment s) is t he same as t hat appl i cabl e t o assessment s( under payment s) .

*a. Tr ueb. Fal se


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59. Dur i ng any mont h i n whi ch bot h t he f ai l ur e t o f i l e penal t y and t hef ai l ur e t o pay penal t y appl y, t he f ai l ur e t o f i l e penal t y i s increasedby the amount of t he f ai l ur e t o pay penal t y.

a. Tr ue

*b. Fal se

60. When i nterest i s char ged on a def i ci ency, any part of a mont hcount s as a f ul l mont h.

a. Tr ue*b. Fal se

61. For t he negl i gence penal t y t o appl y, t he under payment must becaused by i nt ent i onal di sr egar d of r ul es and regul at i ons wi t hout i nt ent

t o def r aud.

*a. Tr ueb. Fal se

62. Upon audi t by the I RS, Fai t h i s assessed a def i ci ency of $40, 000 ofwhi ch $25, 000 i s at t r i but abl e t o negl i gence. The 20% negl i gence penal t ywi l l appl y to $25, 000.

*a. Tr ueb. Fal se

63. I f t he t ax def i ci ency i s at t r i but abl e t o f r aud, t he negl i gencepenal t y wi l l not be i mposed.

*a. Tr ueb. Fal se

64. The civil f r aud penal t y can ent ai l l ar ge f i nes and possi bl ei ncar cer at i on.

a. Tr ue*b. Fal se

65. Even t hough a cl i ent r ef uses t o cor r ect an er r or on a past r et ur n,i t may be possi bl e f or a pr act i t i oner t o cont i nue to pr epar e ret ur nsf or the cl i ent .

*a. Tr ueb. Fal se


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66. I n pr epar i ng an i ncome t ax ret ur n, t he use of a cl i ent s est i mat esi s not per mi t t ed.

a. Tr ue*b. Fal se

67. I n pr epar i ng a t ax ret ur n, al l quest i ons on t he r et ur n must beanswered.

a. Tr ue*b. Fal se

68. A CPA f i r m i n Cal i f or ni a sends many of i t s l ess compl ex t ax ret ur nst o be pr epar ed by a gr oup of account ant s i n I ndi a. I f cer t ai npr ocedur es ar e f ol l owed, t hi s out sour ci ng of t ax ret ur n pr epar at i on i spr oper .

*a. Tr ueb. Fal se

69. The obj ect i ve of pay-as-you-go (paygo) i s t o achi eve r evenueneut ral i t y.

*a. Tr ueb. Fal se

70. When Congress enacts a t ax cut t hat i s phased i n over a peri od ofyear s, r evenue neut r al i t y i s achi eved.

a. Tr ue*b. Fal se

71. A t ax cut enacted by Congr ess t hat cont ai ns a sunset provision wi l lmake t he t ax cut t empor ary.

*a. Tr ueb. Fal se

72. The t ax l aw pr ovi des var i ous t ax credi t s, deduct i ons, andexcl usi ons t hat are desi gned to encour age taxpayer s t o obt ai naddi t i onal educat i on. These pr ovi si ons can be j ust i f i ed on bot heconomi c and equi t y gr ounds.

a. Tr ue


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*b. Fal se

73. Var i ous t ax pr ovi si ons encour age t he cr eat i on of cer t ai n t ypes ofr et i r ement pl ans. Such pr ovi si ons can be j ust i f i ed on bot h economi c andsoci al gr ounds.

*a. Tr ueb. Fal se

74. To l essen, or el i mi nat e, t he ef f ect of mul t i pl e t axat i on, at axpayer who i s subj ect t o bot h f orei gn and U. S. i ncome t axes on t hesame i ncome i s al l owed ei t her a deduct i on or a credi t f or t he f or ei gnt ax pai d.

*a. Tr ueb. Fal se

75. To mi t i gat e t he ef f ect of t he annual account i ng per i od concept , t het ax l aw per mi t s t he car r yf or war d t o other year s of t he excesschar i t abl e cont r i but i ons of a par t i cul ar year .

*a. Tr ueb. Fal se

76. J ason s busi ness war ehouse i s dest r oyed by f i r e. As t he i nsur ancepr oceeds exceed t he basi s of t he pr oper t y, a gai n r esul t s. I f J ason

shor t l y r ei nvest s t he pr oceeds i n a new warehouse, no gai n i sr ecogni zed due t o t he appl i cat i on of t he wherewi t hal t o pay concept .

*a. Tr ueb. Fal se

77. As i t i s consi st ent wi t h t he wher ewi t hal t o pay concept , t he t axl aw r equi r es a sel l er t o r ecogni ze gai n i n t he year t he i nst al l mentsal e occur s.

a. Tr ue*b. Fal se

78. St eal t h taxes have t he ef f ect of gener at i ng addi t i onal t axes f r omal l t axpayer s.

a. Tr ue*b. Fal se


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79. A pr ovi si on i n t he l aw t hat compel s accr ual basi s t axpayers t o paya t ax on pr epai d i ncome i n t he year r ecei ved and not when earned i sconsi st ent wi t h gener al l y accept ed account i ng pr i nci pl es.

a. Tr ue*b. Fal se

80. As a matt er of admi ni st r at i ve conveni ence, t he I RS woul d pr ef er t ohave Congress decr ease ( r ather t han i ncr ease) t he amount of t hest andar d deduct i on al l owed t o i ndi vi dual t axpayer s.

a. Tr ue*b. Fal se

81. I n cases of doubt , cour t s have hel d t hat t ax rel i ef pr ovi si onsshoul d be br oadl y const r ued i n f avor of t axpayer s.

a. Tr ue*b. Fal se

82. On occasi on, Congr ess has t o enact l egi sl at i on t hat cl ar i f i es t het ax l aw i n order t o change a r esul t r eached by t he U. S. Supreme Cour t .

*a. Tr ueb. Fal se

83. Whi ch, i f any, of t he f ol l owi ng st at ement s best descr i bes t hehi st or y of t he Feder al i ncome t ax?

a. I t di d not exi st dur i ng t he Ci vi l War . *b. The Federal i ncome tax on corporat i ons was hel d by t he U. S.Supr eme Cour t t o be al l owabl e under t he U. S. Const i t ut i on. c. The Federal i ncome tax on i ndi vi dual s was hel d by t he U. S.Supr eme Cour t t o be al l owabl e under t he U. S. Const i t ut i on. d. Both t he Federal i ncome tax on i ndi vi dual s and on cor porat i onswas hel d by t he U. S. Supr eme Cour t t o be contr ary t o the U. S.Const i t ut i on. e. None of t he above.

84. Whi ch, i f any, i s not one of Adam Smi t h s canons of t axat i on?

a. Economy. b. Cer t ai nt y. c. Conveni ence. *d. Si mpl i ci t y. e. Equal i t y.


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85. Whi ch, i f any, of t he f ol l owi ng t axes ar eproportional ( r at her t han

progressive) ?

*a. St at e gener al sal es t ax. b. Federal cor porat e i ncome t ax. c. Feder al est at e t ax. d. Feder al gi f t t ax.e. Al l of t he above.

86. Whi ch, i f any, of t he f ol l owi ng t r ansacti ons wi l l increase a t axi ngj ur i sdi ct i on s r evenue f r om t he ad valorem t ax i mposed on r eal est ate?

a. A r esi dent di es and l eaves hi s f ar m t o hi s chur ch. b. A l arge pr opert y owner i ssues a conservat i on easement as t osome of her l and. *c. A t ax hol i day i ssued 10 years ago has expi r ed.

d. A bankr upt motel i s acqui r ed by t he Red Cr oss and i s t o beused t o pr ovi de housi ng f or homel ess per sons. e. None of t he above.

87. Which, if any, of the following transactions will decrease a taxing

jurisdictions ad valoremtax revenue imposed on real estate?

*a. A t ax hol i day i s gr ant ed t o an out - of - st at e busi ness t hat i ssear chi ng f or a new f act or y si t e. b. An abandoned chur ch i s conver t ed t o a r est aur ant .

c. A publ i c school i s r azed and t ur ned i nt o a ci t y par k. d. A l ocal uni ver si t y sel l s a dor mi t or y t hat wi l l be conver t edf or use as an apar t ment bui l di ng. e. None of t he above.

88. Whi ch, i f any, of t he f ol l owi ng i s a t ypi cal char acteri st i c of anad valorem t ax on personal t y?

a. Taxpayer compl i ance i s great er f or personal use pr oper t y t hanf or busi ness use pr oper t y. *b. The t ax on aut omobi l es somet i mes consi ders t he age of t hevehi cl e. c. Most st ates i mpose a t ax on i nt angi bl es. d. The tax on i nt angi bl es gener at es consi der abl e revenue si nce i ti s di f f i cul t f or t axpayer s to avoi d. e. None of t he above.

89. Feder al exci se taxes t hat ar e no longer imposed i ncl ude:

a. Tax on ai r t r avel . b. Tax on wager i ng.


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c. Tax on t he manuf act ur e of spor t i ng equi pment . d. Tax on al cohol . *e. None of t he above.

90. Taxes not imposed by t he Federal government i ncl ude:

a. Tobacco exci se tax. b. Cust oms dut i es ( t ar i f f s on i mpor t s) . *c. Tax on rent car s. d. Gas guzzl er t ax. e. None of t he above.

91. Taxes l evi ed by both st ates and the Feder al government i ncl ude:

a. Gener al sal es t ax. b. Cust om dut i es. c. Hotel occupancy t ax. d. Franchi se t ax. *e. None of t he above.

92. Taxes l evi ed by all st at es i ncl ude:

*a. Tobacco exci se t ax. b. I ndi vi dual i ncome t ax. c. I nher i t ance t ax. d. Gener al sal es t ax. e. None of t he above.

93. A use tax i s i mposed by:

a. The Federal gover nment and al l st ates. b. The Federal gover nment and a maj or i t y of t he st ates. c. Al l st at es and not t he Feder al government . *d. Most of t he st ates and not t he Feder al gover nment .e. None of t he above.

94. Burt and Li sa ar e marr i ed and l i ve i n a common l aw st ate. Burtwant s t o make gi f t s t o t hei r f our chi l dr en i n 2013. What i s t he maxi mumamount of t he annual excl usi on t hey wi l l be al l owed f or t hese gi f t s?

a. $14, 000. b. $28, 000. c. $56, 000. *d. $112, 000. e. None of t he above.


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95. Pr oper t y can be t r ansf er r ed wi t hi n t he f ami l y gr oup by gi f t or atdeat h. One mot i vat i on f or pr ef er r i ng t he gi f t appr oach i s:

a. To t ake advant age of t he hi gher uni f i ed t r ansf er t ax cr edi tavai l abl e under t he gi f t t ax. b. To avoi d a f ut ur e decl i ne i n val ue of t he pr oper t y t r ansf er r ed. *c. To t ake advant age of t he per donee annual excl usi on.d. To shi f t i ncome t o hi gher br acket donees. e. None of t he above.

96. I ndi cat e whi ch, i f any, st at ement i s incorrect. St ate i ncome t axes:

a. Can pi ggyback t o the Feder al ver si on. *b. Cannot appl y t o vi si t i ng nonr esi dent s. c. Can decoupl e f r om t he Feder al ver si on.d. Can provi de occasi onal amnest y pr ogr ams.

e. None of t he above.

97. St ate i ncome t axes generally can be character i zed by:

*a. The same dat e f or f i l i ng as t he Federal i ncome tax. b. No pr ovi si on f or wi t hhol di ng pr ocedur es.c. Al l owance of a deduct i on f or Federal i ncome taxes pai d. d. Appl yi ng onl y t o i ndi vi dual s and not appl yi ng t o cor por at i ons. e. None of t he above.

98. A char acteri st i c of FI CA i s t hat :

a. I t does not appl y when one spouse works f or t he other spouse. b. I t i s i mposed onl y on t he empl oyer .c. I t pr ovi des a modest sour ce of i ncome i n t he event of l oss ofempl oyment . d. I t i s admi ni st ered by both st ate and Federal gover nment s. *e. None of t he above.

99. A char act er i st i c of FUTA i s t hat :

a. I t i s i mposed on bot h empl oyer and empl oyee. b. I t i s i mposed sol el y on t he empl oyee. *c. Compl i ance r equi r es f ol l owi ng gui del i nes i ssued by bot h st at eand Feder al r egul at or y aut hor i t i es. d. I t i s appl i cabl e t o spouses of empl oyees but not t o anychi l dren under age 18. e. None of t he above.

100. The U. S. ( ei t her Feder al , st at e, or l ocal ) does not i mpose:


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a. Franchi se t axes. b. Severance t axes. c. Occupat i onal f ees. d. Cust om dut i es. *e. Expor t dut i es.

101. The proposed flat tax:

a. Woul d el i mi nate t he i ncome t ax.*b. Woul d si mpl i f y t he i ncome t ax. c. Woul d tax the i ncrement i n val ue as goods move t hrough t hepr oduct i on and manuf actur i ng st ages t o t he market pl ace. d. I s a t ax on consumpt i on. e. None of t he above.

102. A VAT ( val ue added tax) :

*a. I s regr essi ve i n i t s ef f ect . b. Has not pr oved popul ar out si de of t he U. S. c . I s not a t ax on consumpt i on. d. I s used excl usi vel y by t hi r d wor l d ( l ess devel oped) count r i es. e. None of t he above.

103. Char acteri st i cs of t he Fai r Tax (i . e. , nat i onal sal es tax)i ncl ude whi ch, i f any, of t he f ol l owi ng:

a. Abol i t i on of t he Feder al i ndi vi dual ( but not t he cor por at e)i ncome t ax. b. Abol i t i on of al l Feder al i ncome t axes but r et ent i on of payr ol lt axes ( i ncl udi ng the sel f - empl oyment t ax) . c. Abol i t i on of al l Feder al i ncome t axes and payr ol l t axes butr et ent i on of t he Feder al est at e and gi f t t axes. *d. Abol i t i on of al l Feder al i ncome and payr ol l t axes as wel l ast he Feder al est at e and gi f t t axes. e. None of t he above.

104. I n t er ms of pr obabi l i t y, whi ch of t he f ol l owi ng t axpayer s woul d beleast likely t o be audi t ed by t he I RS?

a. Taxpayer owns and operates a check- cashi ng ser vi ce. *b. Taxpayer i s an empl oyed el ect r i ci an. c. Taxpayer j ust r ecei ved a $3 mi l l i on per sonal i nj ur y awar d as ar esul t of a l awsui t . d. Taxpayer j ust won a $1 mi l l i on sl ot machi ne j ackpot at a LasVegas casi no. e. Taxpayer has been audi t ed sever al t i mes bef ore.


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105. Whi ch of t he f ol l owi ng is a char act er i st i c of t he audi t pr ocess?

a. Most t axpayer audi t s i nvol ve speci al agent s. b. Sel f - empl oyed t axpayer s ar e l ess l i kel y t o be sel ect ed f oraudi t t han empl oyed t axpayer s. *c. Less i mport ant i ssues ar e handl ed by means of acorr espondence audi t . d. I f a t axpayer di sagr ees wi t h t he I RS audi t or s f i ndi ng, t heonl y resor t i s t o t he cour t s. e. None of t he above.

106. Davi d f i l es hi s t ax ret ur n 45 days af t er t he due dat e. Al ong wi t ht he ret ur n, Davi d r emi t s a check f or $40, 000 whi ch i s t he bal ance oft he tax owed. Di sr egar di ng t he i nt er est el ement , Davi d s t ot al f ai l ur et o f i l e and t o pay penal t i es ar e:

a. $400. b. $3, 600. *c. $4, 000.d. $4, 400.e. None of t he above.

107. A char acteri st i c of t he f r aud penal t i es i s:

a. When negl i gence and ci vi l f r aud appl y t o a def i ci ency, t henegl i gence penal t y pr edomi nat es. *b. Cr i mi nal f r aud can r esul t i n a f i ne and a pr i son sent ence.

c. The cr i mi nal f r aud penal t y i s 75% of t he def i ci encyat t r i but abl e t o t he f r aud. d. The I RS has t he same bur den of pr oof i n t he case of cr i mi nalf r aud t han wi t h ci vi l f r aud. e. None of t he above.

108. Regar di ng pr oper et hi cal gui del i nes, whi ch ( i f any) of t hef ol l owi ng i s cor r ect?

*a. The use of cl i ent est i mat es i n pr epari ng a ret ur n may beaccept abl e.

b. Under no ci r cumst ances shoul d a quest i on on a t ax retur n bel ef t unanswered. c. I f a cl i ent has made a mi st ake i n a pr i or year s r et ur n andr ef uses t o cor r ect i t , you shoul d wi t hdr aw f r om t he engagement . d. I f t he exact amount of a deduct i on i s not cer t ai n ( e. g. ,ar ound mi d- $600s) , i t should be r ecor ded as an odd amount ( i . e. ,$649) so as t o i ncr ease t he appearance of gr eat er cer t ai nt y. e. None of t he above.

109. Bot h economi c and soci al consi derat i ons can be used t o j ust i f y:


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a. Favor abl e t ax t r eat ment f or acci dent and heal t h pl ans pr ovi dedf or empl oyees and f i nanced by empl oyer s.b. Di sal l owance of any deduct i on f or expendi t ur es deemed t o becont r ar y t o publ i c pol i cy ( e. g. , f i nes, penal t i es, i l l egalki ckbacks, br i bes t o gover nment of f i ci al s) .

*c. Var i ous t ax cr edi t s, deduct i ons, and excl usi ons t hat ar edesi gned t o encour age taxpayers t o obt ai n addi t i onal educat i on. d. Al l owance of a deduct i on f or s t at e and l ocal i ncome t axes pai d. e. None of t he above.

110. Soci al consi der at i ons can be used to j ust i f y:

*a. Al l owance of a cr edi t f or chi l d car e expenses. b. Al l owi ng excess capi t al l osses t o be car r i ed over t o ot heryears. c. Al l owi ng accel er at ed amor t i zat i on f or t he cost of i nst al l i ng

pol l ut i on cont rol f aci l i t i es . d. Al l owi ng a Feder al i ncome tax deduct i on f or st at e and l ocalsal es t axes.e. None of t he above.

111. Al l owi ng a domest i c pr oduct i on act i vi t i es deduct i on f or cer t ai nmanuf act ur i ng i ncome can be j ust i f i ed:

a. As mi t i gat i ng t he ef f ect of t he annual account i ng per i odconcept . b. As pr omot i ng admi ni st r at i ve f easi bi l i t y.

*c. By economi c consi der at i ons.d. Based on t he wher ewi t hal t o pay concept . e. None of t he above.

112. Provi si ons i n the t ax l aw t hat pr omot e ener gy conservat i on andmor e use of al t er nat i ve ( non- f ossi l ) f uel s can be j ust i f i ed by:

a. Pol i t i cal consi der at i ons. *b. Economi c and soci al consi derat i ons. c. Pr omot i ng admi ni str at i ve f easi bi l i t y.d. Encour agement of smal l busi ness.e. None of t he above.

113. Whi ch, i f any, of t he f ol l owi ng pr ovi si ons cannot be j usti f i ed asmi t i gat i ng the ef f ect of t he annual account i ng per i od concept ?

*a. Nonr ecogni t i on of gai n al l owed f or i nvol unt ar y conver si ons. b. Net oper at i ng l oss carr yback and car r yover pr ovi si ons. c. Car r y over of excess char i t abl e cont r i but i ons. d. Use of t he i nst al l ment met hod t o recogni ze gai n. e. Car r y over of excess capi t al l osses.


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114. Whi ch, i f any, of t he f ol l owi ng pr ovi si ons of t he t ax l aw cannotbe j ust i f i ed as pr omot i ng admi ni st r at i ve f easi bi l i t y ( si mpl i f yi ng t het ask of t he I RS) ?

a. Penal t i es ar e i mposed f or f ai l ur e t o f i l e a r et ur n or pay at ax on t i me. b. Prepai d i ncome i s t axed i n t he year r ecei ved and not i n t heyear ear ned. c. Annual adj ust ment s f or i ndexat i on i ncr eases t he amount of t hest andar d deduct i on al l owed. d. Casual t y l osses must exceed 10% of AGI t o be deduct i bl e. *e. A deduct i on i s al l owed f or char i t abl e cont r i but i ons.

115. A l andl ord l eases propert y upon whi ch t he t enant makesi mpr ovement s. The i mpr ovement s ar e si gni f i cant and ar e not made i n l i eu

of r ent . At t he end of t he l ease, t he val ue of t he i mpr ovement s are noti ncome to t he l andl or d. Thi s r ul e i s an exampl e of :

a. A cl ear r ef l ecti on of i ncome r esul t . b. The t ax benef i t r ul e. c. The arm s l engt h concept . *d. The wherewi t hal t o pay concept . e. None of t he above.

116. Match the statements that relate to each other. Note: Some choicesmay be used more than once or not at all.J ock t axDecoupl i ngDI FTax f r aud

suspectedRevenue neut r al i t yRARWherewi t hal t o pay concept Mi t i gat i on oft he annual account i ng peri od concept Tax on t r ansf ers at death( i nher i t ance t ype)Exci se t ax on t obaccoUse t axI ncome tax amnest yI mportt axes ( cust oms dut i es) Pay- as- you- go ( paygo)Expor t t axesStat e i ncomet ax appl i ed to vi si t i ng nonr esi dent Undoi ng the pi ggyback r esul t Nocor r ect mat ch pr ovi ded I RS speci al agent I deal budget goal as t o newt ax l egi sl at i on No change i s one possi bl e r esul t Def er r al of gai nsf r om i nvol unt ar y conver si ons Car r yback and car r yf or war d of netoperat i ng l osses I mposed by some st ates but not t he Feder algovernment I mposed by al l st at es and t he Federal government Everyst ate t hat has a general sal es t ax has one I mposed by some st ates butnot t he Federal government I mposed onl y by the Federal governmentI deal budget goal as t o new t ax l egi sl at i on No cor r ect match pr ovi ded

[ a] 1. J ock t ax[ b] 2. Decoupl i ng[ c] 3. DI F[ d] 4. Tax f r aud suspect ed[ e] 5. Revenue neut r al i t y[ f ] 6. RAR[ g] 7. Wherewi t hal t o pay concept[ h] 8. Mi t i gat i on of t he annual account i ng per i od concept[ i ] 9. Tax on t r ansf er s at deat h ( i nher i t ance t ype)[ j ] 10. Exci se t ax on t obacco


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[ k] 11. Use t ax[ l ] 12. I ncome t ax amnest y[ m] 13. I mport t axes ( cust oms dut i es)[ n] 14. Pay- as- you- go ( paygo)[ o] 15. Expor t t axes

a. St at e i ncome t ax appl i ed t o vi si t i ng nonr esi dentb. Undoi ng t he pi ggyback r esul tc. No cor r ect match provi dedd. I RS speci al agente. I deal budget goal as t o new t ax l egi sl at i onf . No change i s one possi bl e r esul tg. Def er r al of gai ns f r om i nvol unt ar y conver si onsh. Carr yback and car r yf or ward of net operat i ng l ossesi . I mposed by some st at es but not t he Federal governmentj . I mposed by al l st at es and t he Federal governmentk. Ever y st ate that has a gener al sal es t ax has onel . I mposed by some st at es but not t he Federal governmentm. I mposed onl y by t he Federal government

n. I deal budget goal as t o new t ax l egi sl at i ono. No cor r ect match provi ded

117. Match the statements that relate to each other. Note: Some choicesmay be used more than once.Of f i ce audi t Fi el d audi t Fai l ure to f i l epenal t yFai l ur e to pay penal t yNegl i gence penal t yCr i mi nal f r audpenal t yFraud and st at ut e of l i mi t at i onsEar l y f i l i ng and st at ut e ofl i mi t at i ons (def i ci ency si t uat i ons)Lat e f i l i ng and statut e l i mi t at i ons( def i ci ency si t uat i ons) No r et ur n and st at ut e l i mi t at i onsMor e t han 25%gr oss i ncome omi ssi on and st at ut e of l i mi t at i onsI nt er est due onr ef undConduct ed at I RS of f i ce Conduct ed at t axpayer s of f i ce 5% permont h ( 25% l i mi t ) 0. 5% per mont h ( 25% l i mi t ) 20% of under payment No

cor r ect mat ch pr ovi ded No st at ut e of l i mi t at i ons ( per i od remai ns open)3 year s f r om due dat e of r et ur n 3 year s f r om dat e r et ur n i s f i l ed Nost at ut e of l i mi t at i ons ( per i od remai ns open) 6 year s 45- day gr aceper i od al l owed t o I RS 75% of underpayment

[ a] 1. Of f i ce audi t[ b] 2. Fi el d audi t[ c] 3. Fai l ure to f i l e penal t y[ d] 4. Fai l ur e t o pay penal t y[ e] 5. Negl i gence penal t y[ f ] 6. Cr i mi nal f r aud penal t y[ g] 7. Fraud and st at ut e of l i mi t at i ons[ h] 8. Ear l y f i l i ng and statut e of l i mi t at i ons (def i ci ency

si t uat i ons)[ i ] 9. Lat e f i l i ng and statut e l i mi t at i ons (def i ci ency

si t uat i ons)[ j ] 10. No r et ur n and st at ut e l i mi t at i ons[ k] 11. More than 25% gross i ncome omi ssi on and st atut e of

l i mi t at i ons[ l ] 12. I nt er est due on r ef und

a. Conduct ed at I RS of f i ceb. Conduct ed at t axpayer s of f i cec. 5% per mont h ( 25% l i mi t )


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d. 0. 5% per mont h ( 25% l i mi t )e. 20% of under paymentf . No cor r ect match pr ovi dedg. No st at ut e of l i mi t at i ons ( per i od r emai ns open)h. 3 year s f r om due dat e of r et ur ni . 3 years f romdat e return i s f i l ed

j . No st at ut e of l i mi t at i ons ( per i od r emai ns open)k. 6 year sl . 45- day gr ace per i od al l owed t o I RSm. 75% of underpayment

118. Using the choices provided below, show the justification for eachprovision of the tax law listed. A t ax cr edi t f or amount s spent t of ur ni sh car e f or chi l dr en whi l e t he par ent i s at wor k. Addi t i onaldepr eci at i on deduct i on al l owed f or t he year t he asset i s acqui r ed. Taxbr acket s are i ncreased f or i nf l at i on. A smal l busi ness cor por at i on canel ect t o avoi d t he cor por at e i ncome t ax. A deduct i on f or cont r i but i onsby an empl oyee to cer t ai n ret i r ement pl ans. A deduct i on f or qual i f i ed

t ui t i on pai d t o obt ai n hi gher educat i on. A deduct i on f or cer t ai nexpenses ( i nt er est and t axes) i nci dent t o home owner shi p. A Feder aldeduct i on f or st at e and l ocal i ncome taxes pai d. A deduct i on f or cer t ai ni ncome f r om manuf acturi ng acti vi t i es. A br i be t o t he l ocal sher i f f ,al t hough busi ness rel at ed, i s not deduct i bl e. Cont r i but i ons t ochar i t abl e or gani zat i ons are deduct i bl e. A Feder al deduct i on f or st at eand l ocal sal es t axes pai d. Tax cr edi t s avai l abl e f or t he pur chase of avehi cl e t hat uses al t er nat i ve ( non- f ossi l ) f uel s. Tax cr edi t s f or homei mpr ovement s t hat conser ve energy. More r api d expensi ng f or t ax pur posesof t he costs of i nstal l i ng pol l ut i on cont r ol devi ces. Soci alconsi der at i ons Economi c consi derat i ons Equi t y consi derat i ons Economi cconsi der at i ons Economi c consi derat i ons Economi c consi derat i ons Economi cconsi der at i ons Equi t y consi der at i ons Economi c consi der at i ons Soci al

consi der at i ons Soci al consi der at i ons Equi t y consi der at i ons Economi cconsi der at i ons Economi c consi derat i ons Economi c consi derat i ons

[ a] 1. A t ax credi t f or amount s spent t o f ur ni sh car e f orchi l dr en whi l e t he par ent i s at wor k.

[ b] 2. Addi t i onal depr eci at i on deduct i on al l owed f or t he yeart he asset i s acqui r ed.

[ c] 3. Tax br acket s ar e i ncreased f or i nf l at i on.[ d] 4. A smal l busi ness cor por at i on can el ect t o avoi d t he

cor por at e i ncome t ax.[ e] 5. A deduct i on f or cont r i but i ons by an empl oyee to cer t ai n

r et i r ement pl ans.[ f ] 6. A deducti on f or qual i f i ed t ui t i on pai d t o obt ai n hi gher

educat i on.[ g] 7. A deduct i on f or cer t ai n expenses ( i nt er est and t axes)

i nci dent t o home owner shi p.[ h] 8. A Feder al deduct i on f or st at e and l ocal i ncome taxes

pai d.[ i ] 9. A deduct i on f or cer t ai n i ncome f r om manuf act ur i ng

act i vi t i es.[ j ] 10. A br i be t o t he l ocal sher i f f , al t hough busi ness

r el at ed, i s not deducti bl e.[ k] 11. Cont r i but i ons t o char i t abl e or gani zat i ons ar e

deducti bl e.


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[ l ] 12. A Feder al deduct i on f or st at e and l ocal sal es t axespai d.

[ m] 13. Tax cr edi t s avai l abl e f or t he pur chase of a vehi cl et hat uses al t er nat i ve ( non- f ossi l ) f uel s.

[ n] 14. Tax credi t s f or home i mprovement s t hat conser ve energy.[ o] 15. More r api d expensi ng f or t ax pur poses of t he cost s of

i nstal l i ng pol l ut i on cont r ol devi ces.

a. Soci al consi der at i onsb. Economi c consi der at i onsc. Equi t y consi der at i onsd. Economi c consi der at i onse. Economi c consi der at i onsf . Economi c consi der at i onsg. Economi c consi der at i onsh. Equi t y consi der at i onsi . Economi c consi der at i onsj . Soci al consi derat i onsk. Soci al consi der at i ons

l . Equi t y consi der at i onsm. Economi c consi der at i onsn. Economi c consi der at i onso. Economi c consi der at i ons

119. Tayl or , a wi dow, makes cash gi f t s t o her f i ve mar r i ed chi l dr en( i ncl udi ng t hei r spouses) and t o her seven gr andchi l dr en. What i s t hemaxi mumamount Tayl or can gi ve f or cal endar year 2013 wi t hout usi ng heruni f i ed t r ansf er t ax cr edi t ?

Corr ect Answer:

$221, 000. $14, 000 ( annual excl usi on) 17 donees = $238, 000.

120. For t he t ax year 2013, Noah repor t ed gross i ncome of $300, 000 onhi s t i mel y f i l ed Feder al i ncome t ax r et ur n.

a. Presumi ng t he gener al r ul e appl i es, whendoes t he st at ut e of l i mi t at i ons onassessment s nor mal l y expi r e?

b. Suppose Noah i nadvert ent l y omi t t ed gr ossi ncome of $76, 000. When does t he st at ute ofl i mi t at i ons on assessment s expi r e?

c. Suppose the omi ssi on was del i ber ate and noti nadver t ent . When does t he st atut e ofl i mi t at i ons on assessment s expi r e?

Corr ect Answer:

a. Three years from April 15, 2014.


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b. If more than 25% of gross income is omitted, a

six-year statute applies (i.e., 6 years from

April 15, 2014). Here, it does as $76,000 is

more than $75,000 (25% $300,000).

c. If fraud is involved, the statute never

expires.

121. Wi t hout obt ai ni ng an extensi on, Pam f i l es her i ncome t ax r et ur n 55days af t er t he due dat e. Wi t h her r et ur n, she pays an addi t i onal t ax of$60, 000. Di sr egar di ng any i nt er est el ement , what i s Pam s penal t y f orf ai l ur e t o pay and t o f i l e?

Corr ect Answer:$6, 000. Di sr egar di ng t he i nt er est el ement , Pam s t ot al penal t i es are asf ol l ows:

Failure to pay penalty (0.5%

$60,000 2 months)

$ 600

Plus: Failure to file

penalty (5% $60,000

2 months)

$6,000

Less failure to pay

penalty for same

period

(6

00)

5,400

Total penalties $6,000

122. On hi s 2013 i ncome tax ret urn, Andr ew omi t t ed i ncome andover st at ed deduct i ons t o t he ext ent t hat hi s i ncome t ax was unders t atedby $500, 000. Di sr egardi ng any i nt er est el ement , what i s Andr ew spenal t y i f t he underst atement was due t o:

a. Negl i gence.

b. Ci vi l f r aud.

c. Cr i mi nal f r aud.

Corr ect Answer:

a. $100,000 (20% $500,000).


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b. $375,000 (75% $500,000).

c. Various fines and/or prison sentence.

123. Sever al year s ago, Logan pur chased ext r a gr azi ng l and f or hi sr anch at a cost of $240, 000. I n 2013, t he l and i s condemned by t hest at e f or devel opment as a hi ghway mai ntenance depot . Under t hecondemnat i on award, Logan r ecei ves $600, 000 f or t he l and. Wi t hi n t hesame year , he repl aces t he pr oper t y wi t h other gr azi ng l and. What i sLogan s t ax si t uat i on i f t he repl acement l and cost :

a. $210, 000?

b. $360, 000?

c. $630, 000?

d. Why?

Corr ect Answer:

a. The full realized gain of $360,000 [$600,000

(condemnation proceeds) $240,000 (cost of

land)] must be recognized, as only $210,000

was reinvested. The condemnation proceeds of$600,000 exceed the amount reinvested by more

than $360,000.

b. As only $360,000 was reinvested in replacement

property, $240,000 ($600,000 $360,000) of

the gain must be recognized.

c. As the full $600,000 was reinvested, no

realized gain need be recognized.

d. If some of the gain is not reinvested,

consistent with the wherewithal to pay concept

there exists the ability to pay the tax.


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124. Pai ge i s t he sol e shar ehol der of Ci t r on Cor por at i on. Dur i ng t heyear , Pai ge l eases a bui l di ng t o Ci t r on f or a mont hl y rent al of $80, 000.I f t he f ai r r ent al val ue of t he bui l di ng i s $60, 000, what ar e t hei ncome t ax consequences t o t he part i es i nvol ved?

Corr ect Answer:

The r ent char ged by Pai ge i s not ar ms l engt h; as such, Ci t r onCorpor at i on s r ent deduct i on i s $60, 000 ( not $80, 000) . The $20, 000di f f er ence i s a nondeduct i bl e di vi dend di st r i but i on. For Pai ge, t hechange mer el y r equi r es r ecl assi f i cat i on. I nst ead of $80, 000 of r enti ncome, she has $60, 000 of r ent i ncome and $20, 000 of di vi dend i ncome.

125. I n 1985, Roy l eased r eal est at e t o Dr ab Cor porat i on f or 20 year s.Dr ab Cor por at i on made si gni f i cant capi t al i mpr ovement s t o t he pr oper t y.I n 2005, Roy deci des not t o renew t he l ease and vacates t he pr opert y.At t hat t i me, t he val ue of t he i mpr ovement s i s $800, 000. Roy sel l s t her eal est at e i n 2013 f or $1, 200, 000 of whi ch $900, 000 i s at t r i but abl e t ot he i mprovement s. How and when i s Roy t axed on t he i mpr ovement s made by

Dr ab Corpor at i on?

Corr ect Answer:Roy i s not subj ect t o t axat i on on t he i mpr ovement s unt i l he di sposes oft he pr oper t y ( i . e. , 2013) . Af t er a cont r over si al Supr eme Cour t deci si onyear s ago, Congr ess cl ar i f i ed t he t ax l aw t o make i t more consi st entwi t h t he wher ewi t hal t o pay concept .

126. The Federal i ncome t ax i s based on a pay- as- you- go syst emand hasbecome a mass t ax. Expl ai n t hi s st atement .

Corr ect Answer:The pay- as- you- go syst em i s present i n t he wage and ot her wi t hhol di ngpr ocedur es. I n t he case of sel f - empl oyed per sons, i t i s mani f est ed i nt he r equi r ed quar t er l y payment s f or est i mated t axes. The i ncome t axbecame a mass t ax dur i ng Wor l d War I I when i t s cover age was ext ended t o74% of t he popul at i on ( f r om l ess t han 6% i n 1939) .

127. I n ter ms of AdamSmi t h s canons of t axat i on, how does t he Feder ali ncome tax f are as f ar as economy i s concer ned?

Corr ect Answer:

Economy is present only if the collection procedure of the IRS is

considered. Economy is not present, however, if the focus is on taxpayer

compliance effort and costs.

128. Due t o t he popul at i on change, t he Goose Cr eek School Di st r i ct hasdeci ded t o cl ose one of i t s hi gh school s. Si nce i t has no f ur t her needof t he pr oper t y, t he school i s l i st ed f or sal e. The t wo bi ds i tr ecei ves ar e as f ol l ows:


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Uni t ed Methodi stChur ch

$1, 700, 000

Pl anet Motors 1, 600, 000

The Uni t ed Met hodi st Church woul d use t he proper t y t o est abl i sh asect ar i an mi ddl e school . Pl anet , a wel l - known car deal er shi p, woul dr evamp the pr oper t y and oper at e i t as a br anch l ocat i on.

I f you were a member of t he School Di st r i ct boar d, what f actors woul dyou consi der i n eval uat i ng t he t wo bi ds?

Corr ect Answer:Al t hough t he bi d f r om t he Uni t ed Met hodi st Chur ch i s hi gher , sever alother f actors need t o be consi der ed. Does, f or exampl e, Goose Cr eekSchool di st r i ct exempt pr oper t y owned by chur ches f r om i t s ad valoremt axes? I f so, l osi ng t hi s pr oper t y f r om t he t ax base coul d pr ove ver ycost l y over t he l ong r un. Al so, i t i s pr obabl e that i ncome- pr oduci ng

pr oper t y ( such as a car deal er shi p) woul d be taxed at a hi gher r at et han t hat owned by a nonpr of i t or gani zat i on ( a school operat ed by achur ch) . Thi s assumes, of cour se, t hat t he school woul d be t axed at al l .The auto deal er shi p al so woul d gener at e sal es t ax.

129. Mor gan i nher i t s her f at her s per sonal r esi dence i ncl udi ng al l oft he f urni shi ngs. She pl ans t o add a swi mmi ng pool and sauna t o t hepr opert y and r ent i t as a f urni shed house. What are some of t he advalorem pr opert y t ax probl ems Morgan can ant i ci pat e?

Corr ect Answer:The r eal est at e t axes probabl y wi l l i ncr ease f or several r easons. The

capi t al i mpr ovement s and t he conver si on f r om r esi dent i al t o r ent al wi l lt r i gger t he i ncr ease. Fur t her mor e, t he f ur ni shi ngs may gener at e an advalorem t ax on per sonal t y. ( Dependi ng on appl i cabl e l aw, f ur ni t ur emi ght not be subj ect t o t ax unl ess used f or busi ness pur posessuch asi n t hi s case. )

130. I n 2011, Debor ah became 65 year s ol d. I n 2012 she added a swi mmi ngpool , and i n 2013 she conver t ed t he resi dence to rent al pr opert y andmoved i nt o an assi st ed l i vi ng f aci l i t y. Si nce 2010, Debor ah s adval orem pr opert y taxes have decr eased once and i ncr eased t wi ce. Expl ai n.

Corr ect Answer:The decrease probably came in 2011 when Deborah reached age 65. The

increases probably occurred in 2012 when she added the pool and in 2013

when the residence was converted to rental property.

131. A l ack of compl i ance i n t he payment of use t axes can be r esol vedby sever al means. I n thi s r egar d, comment on the f ol l owi ng:

a. Regi st r at i on of aut omobi l es.


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b. Repor t i ng of I nt er net pur chases on st at e

i ncome t ax r et ur ns.

Corr ect Answer:a. As reflected in Example 5 in the text, re-

registration of a car purchased out-of-state

is the occasion for the owners home state to

collect the use tax.

b. Completing the state income tax return reminds

(or forces) the taxpayer to pay use tax on

out-of-state-purchases.

132. What are t he pr os and cons of t he f ol l owi ng st at e and l ocal t axpr ovi si ons?

a. An ad valorem propert y t ax hol i day madeavai l abl e t o a manuf act ur i ng pl ant t hat i sre l ocat i ng.

b. Hotel occupancy t ax and a r ent al carsur char ge.

c. A back- t o- school sal es t ax hol i day.

Corr ect Answer:

a. Such a holiday is designed to attract new

industry to the area. This means more jobs and

growth in consumption. On the other hand, if

the tax holiday is too generous, this places a

strain on available public revenue. The result

could be that schools and capital maintenance

(roads, public services) will suffer.

b. The hotel occupancy tax and car rental

surcharges are popular because they mainly

impact visitors. Also, they can generate

considerable revenue to finance major capital

improvements. If these taxes become excessive,

however, they could discourage major events


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(such as conventions).

c. Such holidays are very popular with both

merchants and consumers and serve the social

need of defraying some of the costs of sending

children to school. Once established, however,

they are difficult to get rid of. Thus, they

become an annual drain on sales tax revenue.

133. What i s a severance t ax? How product i ve can i t be i n terms ofgenerat i ng r evenue?

Corr ect Answer:A sever ance tax i s one i mposed when nat ur al r esour ces ( e. g. , oi l , gas,i r on or e, coal ) ar e extr act ed. I t i s based on t he not i on t hat t he st at ehas an i nt erest i n such r esour ces. For some st at es, t he r evenue f r omsever ance t axes can be si gni f i cant . Al aska, f or exampl e, r el i es heavi l yon i t s severance t axes and has been abl e t o avoi d both a st ate i ncomet ax and a gener al sal es t ax.

134. What i s t he di f f erence between an i nher i t ance t ax and an est atet ax? Who i mposes t hese t axes?

Corr ect Answer:

An inheritance tax is a tax on the right to receive property from adecedent. An estate tax is imposed on the right to pass property at death.

The Federal government imposes estate taxes, while states impose

inheritance taxes. Some states impose both, while others impose neither.

135. Logan di es wi t h an est at e wor t h $20 mi l l i on. Under hi s wi l l , $10mi l l i on passes t o hi s wi f e whi l e $10 mi l l i on goes t o hi s chur ch. Whati s Logan s Feder al est at e t ax r esul t ?

Corr ect Answer:

None. After a marital deduction of $10 million and a charitable deductionof $10 million, Logans taxable estate is $0.

136. Wi t h r egard t o st ate i ncome taxes, expl ai n what i s meant by t hej ock tax?

Corr ect Answer:


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Although states have a right to levy an income tax on all nonresidents who

earn income within the state, they usually do so only on highly paid

visitors. Such persons are often athletes, hence the designation of jock

tax.

137. Vi r t ual l y al l st at e i ncome tax r et ur ns cont ai n checkof f boxes f ordonat i ons t o var i ous causes. On what gr ounds has t hi s pr ocedur e beencr i t i ci zed?

Corr ect Answer:

In many cases the procedure is overused (i.e., a multiplicity of boxes).

This overuse adds complexity to the return. Also, in most cases the

donation is being drawn from any income tax refund that might be due. Thus,

taxpayers may not fully appreciate that they are paying for such checkoffs.

138. State and l ocal gover nment s ar e somet i mes f orced t o f i nd ways t ogener at e addi t i onal r evenue. Comment on t he pros and cons of t hef ol l owi ng pr ocedur es:

a. Decoupl e what woul d be par t of t he pi ggybackf or mat of t he st ate i ncome t ax.

b. Tax amnest y pr ovi si ons.

c. I nt er net shami ng.

Corr ect Answer:

a. The decoupling process is easily accomplished

as to new Federal tax changes that have never

taken effect at the state level. Taxpayers are

not apt to miss what they never have enjoyed.

b. Tax amnesty provisions generate considerable

revenue. It also unmasks many taxpayers who

have not previously paid taxes. Now that the

taxing jurisdiction is aware of theirexistence, they will tend to pay taxes in the

future.

c. By use of a public Web site, the taxing

authority posts the names of those taxpayers

that are delinquent as to various taxes (e.g.,

sales, income). This public humiliation (or

threat of) very often results in compliance.


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139. Br i ana l i ves i n one st at e and wor ks i n t he adj oi ni ng st at e. Bot h

st at es t ax t he i ncome she ear ns f r om her j ob. Does Br i ana have anyr el i ef f r om t hi s appar ent doubl e taxat i on of t he same i ncome?

Corr ect Answer:

Most states allow their residents some form of tax credit for the income

taxes paid to other states. In Brianas case, the credit would be allowed

by the state where she lives for the taxes paid to the state where she

works.

140. I n l at e J une 2013, Ar t i s audi t ed by t he st at e and a l ar ge

def i ci ency i s assessed. I n November of t he same year, hi s Feder ali ncome t ax return i s audi t ed by t he I RS. What has probabl y happened?

Corr ect Answer:

The IRS has been notified by the state concerning the results of the June

audit.

141. Two mont hs af t er t he bur gl ar y of hi s per sonal r esi dence, Er i c i saudi t ed by t he I RS. Among t he i t ems t aken i n t he bur gl ary was a shoebox cont ai ni ng appr oxi matel y $50, 000 i n cash. Er i c i s t he owner andoper at or of a cash- and- car r y l i quor st ore. Er i c wonders why he was

audi t ed. Can you hel p expl ai n?

Corr ect Answer:Al t hough Er i c s audi t by t he I RS coul d be t he r esul t of sheer chance,t hi s appear s unl i kel y. Pr ess cover age of t he bur gl ar y, par t i cul ar l y i ft he i t ems st ol en were enumerated, coul d have put t he I RS on not i ce. Whywoul d anyone keep such a l arge amount of cash at hi s per sonal r esi dence?Al so, Er i c i s i n a busi ness wher e t ax evasi on i s easi l y accompl i shed.

142. Ri ck, t he sol e pr opr i et or of an adul t ent er t ai nment cl ub, i saudi t ed by the I RS. On t he t hi r d day of t he f i el d audi t , t he r egul arI RS agent i s accompani ed by a speci al agent . Shoul d Ri ck be concernedby t hi s new devel opment ? Expl ai n.

Corr ect Answer:

Yes, he should. Special agents rarely appear during an audit unless the

regular agent suspects that fraud may be involved. Considering the type of

business Rick conducts, the heavy use of cash probably exists. With cash

involved, tax evasion is easier to carry out.


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143. Tracy has j ust been audi t ed and the I RS agent has i ssued an RARt hat assesses a l ar ge def i ci ency. Si nce Tr acy di sagr ees wi t h t he resul t ,her next st ep i s t o go t o cour t . Do you agr ee?

Corr ect Answer:

Tracy might save herself time and expense by going to the Appeals Division

of the IRS. Here, the IRS has the authority to negotiate a settlement basedon the hazards of litigation (i.e., the probabilities of winning or

losing). If a settlement is reached, resort to the courts is avoided.

144. Can a t axpayer st ar t t he 3- year st at ut e of l i mi t at i ons onaddi t i onal assessment s by the I RS by f i l i ng hi s i ncome t ax ret ur n ear l y( i . e. , bef or e t he due dat e) ? Can t he per i od be shor t ened by f i l i ngl at e ( i . e. , af t er t he due dat e) ?

Corr ect Answer:The answer i s no i n bot h cases. When f i l i ng ear l y, t he st at ut e st ar t st o r un on t he due date of t he r et ur n. When f i l i ng l ate however , t hef i l i ng dat e cont r ol s .

145. Br ayden f i l es hi s Feder al i ncome tax r et ur n by Apr i l 15, but doesnot pay t he t ax. Al t hough he expect s t o pay i nt er est on t he l argeamount of t ax he st i l l owes, he f eel s t hat t he t i mel y f i l i ng hasavoi ded any penal t i es. I s Br ayden s assumpt i on cor r ect ?

Corr ect Answer:

Although Brayden has avoided the failure to file penalty, the failure to

pay penalty will apply. It is 0.5% per month up to a maximum of 25% of the

tax due as shown on the return.

146. Mel i nda has been r ef err ed t o you by one of your cl i ent s. I n t hepast , she has prepared her own i ncome t ax ret urns, but she has becomeoverwhel med by t he i ncr eased compl exi t y of t he t ax l aw. Consequent l y,Mel i nda want s you t o pr epare her r etur n f or cal endar year 2013. I nr evi ewi ng her 2012 r etur n, you note t hat she has cl ai med as a deduct i ont he ent i r e cost of a busi ness bui l di ng that shoul d have beencapi t al i zed and depr eci at ed. What cour se of act i on shoul d you f ol l ow?

Corr ect Answer:You shoul d r ecommend t o Mel i nda t hat an amended r et urn be f i l ed f or2012 cor r ect i ng t he er r or . I f she r ef uses, you shoul d assess t hegr avi t y of t he er r or and how i t i mpact s on your abi l i t y to f i l e anaccur ate retur n f or 2013. I f you cannot do so, t hen you must decl i net he engagement .

147. Your cl i ent , Conni e, won $12, 000 i n a f oot bal l of f i ce pool . Shesees no r eason t o i ncl ude i t i n her i ncome f or sever al r easons. Fi r st ,t he amount won wi l l not be r eport ed t o t he I RS. Second, as an average


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i ncome empl oyee, she i s unl i kel y t o be audi t ed by t he I RS. Thi r d, shef eel s t hat she has pr obabl y l ost t hi s much i n ot her past of f i cepool s. How do you r espond?

Corr ect Answer:As a pr act i t i oner , you cannot pl ay t he audi t l ot t ery. You must pr esume

she wi l l be audi t ed i r r especti ve of t he pr obabi l i t i es. Al t hough t heuse of est i mates i s al l owed, Conni e s assumpt i ons as t o her l osses ar enot r eal i st i c. Even i f t hey wer e r el i abl e, gambl i ng l osses cannot beof f set agai nst gambl i ng wi nni ngs but must be separ at el y deduct ed. Thus,t he $12, 000 must be r epor t ed as i ncome or you cannot prepare Conni e sreturn.

148. Under what condi t i ons i s i t per mi ssi bl e, f r om an et hi calst andpoi nt , f or a CPA f i r m t o out sour ce t ax r et ur n pr epar at i on t o at hi r d par t y?

Corr ect Answer:

First, the clients confidentiality must be preserved. Second, the CPA

firm must verify the accuracy of the work. Third, the clients must be

advised as to the practice.

149. I n terms of r evenue neut r al i t y, comment on a t ax cut enacted byCongr ess t hat :

a. cont ai ns r evenue of f set s.

b. i ncl udes a sunset pr ovi si on.

Corr ect Answer:

a. Ideally, to achieve revenue neutrality all

tax cuts should be accompanied by revenue

offsets.

b. A sunset provision does not account for the

immediate revenue losses generated by a tax

cut. It merely provides that such losses

will not continue beyond a specified datewhen the tax cut expires and the former tax

law is reinstated.


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150. The tax l aw cont ai ns var i ous t ax credi t s, deduct i ons, andexcl usi ons t hat are desi gned to encour age t axpayers t o obt ai naddi t i onal educat i on. On what gr ounds can t hese pr ovi si ons be j ust i f i ed?

Corr ect Answer:

Social and economic considerations. As to the latter, a better educated

workforce carries a positive economic impact.

151. The tax l aw cont ai ns var i ous provi si ons t hat encour age homeownershi p.

a. On what basi s can t hi s obj ect i ve bej ust i f i ed?

b. Ar e t her e any negat i ve consi der at i ons?Expl ai n.

Corr ect Answer:

a. Home ownership can be justified on economic

and social grounds.

b. Granting tax advantages to persons who are

purchasing their homes places the taxpayers

who rent at a disadvantage. The result is

inequality in treatment.

152. The t ax l aw al l ows an i ncome t ax deduct i on ( or a credi t ) f orf orei gn i ncome t axes. Expl ai n why.

Corr ect Answer:The deduct i on ( or a cr edi t ) f or f or ei gn i ncome t axes can be j ust i f i edon t he gr ounds t hat i t mi t i gat es t he doubl e t ax i mposed on t he samei ncome.

153. The tax l aw al l ows, under cer t ai n condi t i ons, def er r al of gai nr ecogni t i on f or i nvol unt ar y conver si ons.

a. What i s t he j ust i f i cat i on f or t hi s re l i efmeasur e?

b. What happens i f t he proceeds are notent i r el y rei nvest ed?


34/710

Corr ect Answer:

a. By recognizing that the taxpayers relative

economic situation has not changed and that he

or she lacks the wherewithal to pay a tax, any

recognition of realized gain is deferred.

b. If the proceeds from an involuntary conversion

are not fully reinvested in property that is

similar or related in service or use,

recognized gain results. Such recognized gain

cannot exceed realized gain and will be

limited to the amount of the proceeds not

reinvested. Recognition is based on the notion

that the taxpayer now has the wherewithal to

pay the tax that results.

154. How do t he net oper at i ng l oss pr ovi si ons i n t he t ax l aw mi t i gatet he ef f ect of t he annual account i ng concept ?

Corr ect Answer:

Without the allowance of carryback and/or carryover provisions that apply

the excess losses to profitable years, the losses would disappear. As shown

by Example 25, this result places a business with profit and lossfluctuations on a more level playing field with one that maintains a stable

income pattern.

155. I n connecti on wi t h f aci l i t at i ng t he f uncti on of t he I RS i n t headmi ni st r at i on of t he tax l aws, comment on t he ut i l i t y of t he f ol l owi ng:

a. An i ncr ease i n t he amount of t he st andarddeduct i on.

b. Dol l ar and per cent age l i mi t at i ons on t he

deduct i on of per sonal casual t y l osses.

c. Avai l abi l i t y of i nt er est and penal t i es f ort axpayer noncompl i ance.

Corr ect Answer:

a. An increase in the amount of the standard

deduction reduces the number of taxpayers


35/710

who choose to itemize their personal

deductions. This, in turn, cuts down on the

deductions the IRS has to check.

b. Limitations placed on casualty and theft

losses curtail the number of taxpayers who

can claim the deduction.

c. The imposition of extra penalties, in

addition to the tax owed, definitely deters

taxpayer noncompliance.

156. Congr ess r eact s t o j udi ci al deci si ons t hat i nt er pr et t he t ax l awi n di f f er ent ways. When i t appr oves of a deci si on, Congr ess may act t oamend t he Code to i ncor por ate t he hol di ng. When i t di sapproves,Congress may amend t he Code to nul l i f y i t s ef f ect . Gi ve an exampl e ofeach one of t hese congr essi onal r eact i ons.

Corr ect Answer:Congr ess appr oved of t he j udi ci al concl usi on t hat most st ock di vi dendsshoul d be nont axabl e and amended t he Code t o t hi s ef f ect . However , i tdi sagr eed as t o when l easehol d i mprovement s shoul d be t axed t o a l essor .Consi st ent wi t h t he wher ewi t hal t o pay concept , t he i mprovement s are tobe t axed on t he t ermi nat i on of t he l ease. Thus, Congr ess over t ur ned aj udi ci al hol di ng t hat woul d have t axed such i mprovement s i n t he year

t hey are made by t he l essee.

157. Rul es of t ax l aw do not i ncl ude Revenue Rul i ngs and RevenueProcedur es.

a. Tr ue*b. Fal se

158. A t ax pr of essi onal need not worr y about t he r el at i ve wei ght ofaut hor i t y wi t hi n t he var i ous t ax l aw sour ces.

a. Tr ue*b. Fal se

159. I n r ecent year s, Congr ess has been r el at i vel y successf ul i nsi mpl i f yi ng t he Internal Revenue Code.

a. Tr ue*b. Fal se


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160. A t axpayer shoul d al ways mi ni mi ze hi s or her t ax l i abi l i t y.

a. Tr ue*b. Fal se

161. The f i r st codi f i cat i on of t he t ax l aw occur r ed i n 1954.

a. Tr ue*b. Fal se

162. The Code sect i on ci t at i on i s i ncor r ect : 212( 1) .

a. Tr ue*b. Fal se

163. Subchapt er D r ef ers t o t he Corpor at e Di st r i but i ons andAdj ust ment s sect i on of t he Internal Revenue Code.

a. Tr ue*b. Fal se

164. Regul at i ons ar e gener al l y i ssued i mmedi at el y af t er a st at ut e i senact ed.

a. Tr ue*b. Fal se

165. Tempor ar y Regul at i ons ar e onl y publ i shed i n t he Internal RevenueBulletin.

a. Tr ue*b. Fal se

166. Revenue Rul i ngs i ssued by the Nat i onal Of f i ce of t he I RS car r y thesame l egal f or ce and ef f ect as Regul at i ons.

a. Tr ue*b. Fal se

167. A Revenue Rul i ng i s a j udi ci al sour ce of Feder al t ax l aw.

a. Tr ue*b. Fal se


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168. The f ol l owi ng ci t at i on can be a cor r ect ci t at i on: Rev. Rul . 95- 271,I . R. B. No. 54, 18.

a. Tr ue*b. Fal se

169. Revenue Procedur es deal wi t h t he i nternal management pract i ces andpr ocedur es of t he I RS.

*a. Tr ueb. Fal se

170. Post - 1984 l et t er r ul i ngs may be subst ant i al aut hor i t y f or pur posesof t he accur acy- r el at ed penal t y i n 6662.

*a. Tr ueb. Fal se

171. A l et t er r ul i ng appl i es onl y t o the t axpayer who asks f or andobt ai ns a l et t er rul i ng.

*a. Tr ueb. Fal se

172. The I RS i s not r equi r ed t o make a l et t er r ul i ng publ i c.

a. Tr ue*b. Fal se

173. Det er mi nat i on l et t er s usual l y i nvol ve f i nal i zed t r ansacti ons.

*a. Tr ueb. Fal se

174. Techni cal Advi ce Memoranda deal wi t h compl eted t r ansact i ons.

*a. Tr ueb. Fal se

175. Techni cal Advi ce Memor anda may not be ci t ed as pr ecedent s byt axpayer s.

*a. Tr ue


38/710


39/710

183. The Golsen r ul e has been overt ur ned by t he U. S. Supr eme Cour t .

a. Tr ue*b. Fal se

184. The gr ant i ng of a Wr i t of Cer t i or ar i i ndi cat es t hat at l east f ourmember s of t he Supr eme Cour t bel i eve t hat an i ssue i s of suf f i ci enti mpor t ance t o be hear d by t he f ul l cour t .

*a. Tr ueb. Fal se

185. The pet i t i oner r ef er s t o t he par t y agai nst whom a sui t i sbr ought .

a. Tr ue

*b. Fal se

186. The term pet i t i oner i s a synonym f or def endant .

a. Tr ue*b. Fal se

187. The U. S. Tax Cour t meet s most of t en i n Washi ngt on, D. C.

a. Tr ue

*b. Fal se

188. Ther e ar e 11 geogr aphi c U. S. Ci r cui t Cour t of Appeal s.

*a. Tr ueb. Fal se

189. The f ol l owi ng ci t at i on i s cor r ect: Larry G. Mitchell, 131 T. C. 215( 2008) .

*a. Tr ueb. Fal se

190. The I RS i ssues an acqui escence or nonacqui escence onl y f or r egul arTax Court deci si ons.

a. Tr ue*b. Fal se


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191. Ther e i s a di r ect conf l i ct bet ween a Code sect i on adopt ed i n 2008and a t r eat y wi t h France ( si gned i n 2012) . The Code sect i on cont r ol s.

a. Tr ue*b. Fal se

192. The Index to Federal Tax Articles ( publ i shed by Warr en, Gorham,and Lamont ) i s avai l abl e i n pr i nt and el ect r oni c f or mat s.

a. Tr ue*b. Fal se

193. A U. S. Di str i ct Cour t i s t he l owest t r i al cour t .

*a. Tr ue

b. Fal se

194. The resear ch pr ocess shoul d begi n wi t h a tax servi ce.

a. Tr ue*b. Fal se

195. El ect r oni c dat abases are most f r equent l y sear ched by t he keywordappr oach.

*a. Tr ueb. Fal se

196. The t est f or whet her a chi l d qual i f i es f or dependency st at us i sf i r st conduct ed under t he qual i f i ed chi l d r equi r ement .

*a. Tr ueb. Fal se

197. A Bl uebook opi ni on i s subst ant i al aut hor i t y f or pur poses of t heaccur acy r el at ed penal t y.

*a. Tr ueb. Fal se

198. The pr i mar y pur pose of ef f ect i ve t ax pl anni ng i s t o r educe ordef er t he tax i n t he cur r ent t ax year .

a. Tr ue


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*b. Fal se

199. Def err i ng i ncome to a subsequent year i s consi dered t o be t axavoi dance.

*a. Tr ueb. Fal se

200. Tax pl anni ng usual l y i nvol ves a compl et ed t r ansact i on.

a. Tr ue*b. Fal se

201. The Regul at i on sect i on of t he CPA exam i s 60% Taxat i on and 40% Law& Pr of essi onal Responsi bi l i t i es.

*a. Tr ueb. Fal se

202. The I nt ernal Revenue Code was f i r st codi f i ed i n what year?

a. 1913. b. 1923. *c. 1939. d. 1954. e. 1986.

203. Tax bi l l s are handl ed by whi ch commi t t ee i n t he U. S. House ofRepr esent at i ves?

a. Taxat i on Commi t t ee. *b. Ways and Means Commi t t ee. c. Fi nance Commi t t ee. d. Budget Commi t t ee. e. None of t he above.

204. Feder al t ax l egi sl at i on gener al l y or i gi nat es i n what body?

a. I nt er nal Revenue Ser vi ce. b. Senat e Fi nance Commi t t ee. *c. House Ways and Means Commi t t ee. d. Senat e Fl oor . e. None of t he above.


42/710

205. Subt i t l e A of t he I nt er nal Revenue Code cover s whi ch of t hef ol l owi ng t axes?

*a. I ncome t axes. b. Est at e and gi f t t axes. c. Exci se taxes.

d. Empl oyment t axes. e. Al l of t he above.

206. I n 212( 1) , t he number ( 1) st ands f or t he:

a. Sect i on number . b. Subsect i on number . *c. Par agr aph desi gnat i on. d. Subpar agr aph desi gnat i on. e. None of t he above.

207. Whi ch of t hese i s not a cor r ect ci t at i on t o the I nt er nal RevenueCode?

a. Sect i on 211. b. Sect i on 1222( 1) . c. Secti on 2( a) ( 1) ( A) . d. Sect i on 280B. *e. Al l of above ar e cor r ect ci t es.

208. Whi ch of t he f ol l owi ng i s not an admi ni st r at i ve sour ce of t ax l aw?

a. Fi el d Ser vi ce Advi ce. b. Revenue Procedure. c. Techni cal Advi ce Memoranda. d. General Counsel Memor andum. *e. Al l of t he above ar e admi ni st r at i ve sour ces.

209. Whi ch of t he f ol l owi ng sour ces has t he highest t ax val i di t y?

a. Revenue Rul i ng. b. Revenue Procedure. c. Regul at i ons. *d. Internal Revenue Code sect i on. e. None of t he above.

210. Whi ch of t he f ol l owi ng t ypes of Regul at i ons has t he highest t axval i di ty?

a. Tempor ary. *b. Legi sl at i ve.


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c. I nt erpret i ve. d. Pr ocedur al . e. None of t he above.

211. Whi ch st atement i s not t r ue wi t h r espect t o a Regul at i on t hati nt er pr et s t he t ax l aw?

*a. I ssued by t he U. S. Congr ess. b. I ssued by t he U. S. Treasury Depart ment . c. Desi gned t o pr ovi de an i nt er pr et at i on of t he t ax l aw. d. Carr i es mor e l egal f or ce t han a Revenue Rul i ng. e. Al l of t he above st at ement s ar e t r ue.

212. I n addressi ng t he i mpor t ance of a Regul at i on, an I RS agent must :

*a. Gi ve equal wei ght t o the Code and t he Regul at i ons. b. Gi ve more wei ght t o the Code rather t han t o a Regul at i on. c. Gi ve more wei ght t o the Regul at i on r ather t han t o the Code. d. Gi ve l ess wei ght t o the Code rat her t han t o a Regul at i on. e. None of t he above.

213. Whi ch i t em may not be ci t ed as a precedent?

a. Regul at i ons. b. Tempor ary Regul at i ons. *c. Techni cal Advi ce Memoranda. d. U. S. Di str i ct Cour t deci si on. e. None of t he above.

214. What st at ement i s not t r ue wi t h respect t o Tempor ar y Regul at i ons?

*a. May not be ci t ed as pr ecedent . b. I ssued as Proposed Regul at i ons. c. Aut omat i cal l y expi r e wi t hi n t hr ee year s af t er t he dat e ofi ssuance. d. Found i n the Federal Register.e. Al l of t he above st at ement s ar e t r ue.

215. What admi ni st r at i ve r el ease deal s wi t h a pr oposed t r ansact i onr ather t han a compl eted t r ansact i on?

*a. Let t er Rul i ng. b. Techni cal Advi ce Memor andum. c. Det er mi nat i on Let t er . d. Fi el d Ser vi ce Advi ce. e. None of t he above.


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216. Whi ch of t he f ol l owi ng i ndi cat es t hat a deci si on has pr ecedent i alval ue f or f ut ur e cases?

*a. Stare decisis.b. Golsen doct r i ne. c. En banc.d. Reenact ment doct r i ne. e. None of t he above.

217. A t axpayer who l oses i n a U. S. Di st r i ct Cour t may appeal di r ect l yt o t he:

a. U. S. Supreme Cour t . b. U. S. Tax Cour t . c. U. S. Cour t of Feder al Cl ai ms. *d. U. S. Ci r cui t Cour t of Appeal s.

e. Al l of t he above.

218. I f a taxpayer deci des not t o pay a t ax def i ci ency, he or she mustgo to whi ch cour t ?

a. Appr opr i at e U. S. Ci r cui t Cour t of Appeal s. b. U. S. Di str i ct Cour t . *c. U. S. Tax Cour t . d. U. S. Cour t of Feder al Cl ai ms. e. None of t he above.

219. A j ury t r i al i s avai l abl e i n t he f ol l owi ng t r i al court :

a. U. S. Tax Cour t . b. U. S. Cour t of Feder al Cl ai ms. *c. U. S. Di str i ct Cour t . d. U. S. Ci r cui t Cour t of Appeal s. e. None of t he above.

220. A taxpayer maynot appeal a case f r omwhi ch cour t :

a. U. S. Di str i ct Cour t . b. U. S. Ci r cui t Cour t of Appeal s. c. U. S. Cour t of Feder al Cl ai ms. *d. Smal l Case Di vi si on of t he U. S. Tax Cour t . e. None of t he above.

221. The I RS wi l l not acqui esce t o t he f ol l owi ng t ax deci si ons:


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a. U. S. Di str i ct Cour t . b. U. S. Tax Cour t . c. U. S. Cour t of Feder al Cl ai ms. *d. Smal l Case Di vi si on of t he U. S. Tax Cour t . e. Al l of t he above.

222. Whi ch publ i sher of f er s t he Standard Federal Tax Reporter?

a. Resear ch I nst i t ut e of Amer i ca. *b. Commer ce Cl ear i ng House. c. Pr ent i ce- Hal l . d. Lexi sNexi s. e. None of t he above.

223. Whi ch i s pr esent l y not a maj or t ax ser vi ce?

a. Standard Federal Tax Reporter. *b. Federal Taxes. c. United States Tax Reporter. d. Tax Management Portfolios.e. Al l of t he above ar e maj or t ax ser vi ces.

224. Whi ch publ i sher of f er s t he United States Tax Reporter?

*a. Resear ch I nst i t ut e of Amer i ca. b. Commer ce Cl ear i ng House. c. Lexi sNexi s. d. Tax Anal yst s. e. None of t he above.

225. When sear chi ng on an onl i ne t ax ser vi ce, whi ch approach i s moref r equent l y used?

a. Code sect i on appr oach. *b. Keyword appr oach. c. Tabl e of cont ent s appr oach. d. I ndex. e. Al l are about t he same.

226. A r esearcher can f i nd t ax i nf ormat i on on home page si t es of :

a. Gover nment al bodi es. b. Tax academi cs. c. Publ i sher s. d. CPA f i r ms. *e. Al l of t he above.


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227. Tax resear ch i nvol ves whi ch of t he f ol l owi ng pr ocedur es:

a. I dent i f yi ng and r ef i ni ng t he pr obl em. b. Locat i ng the appr opr i at e t ax l aw sour ces. c. Assessi ng t he val i di t y of t he tax l aw sour ces. d. Fol l ow- up. *e. Al l of t he above.

228. Whi ch t ax- r el at ed websi t e pr obabl y gi ves t he best pol i cy-or i ent at i on r esul t s?

a. t axal manac. or g. b. i r s . gov. c. t axsi t es. com. *d. t axanal yst . com. e. ust axcour t . gov.

229. Whi ch cour t deci si on woul d pr obabl y car r y more wei ght?

a. Regul ar U. S. Tax Cour t deci si on. *b. Revi ewed U. S. Tax Cour t deci si on. c. U. S. Di str i ct Cour t deci si on. d. Memorandum Tax Cour t deci si on. e. U. S. Cour t of Feder al Cl ai ms.

230. Whi ch Regul at i ons have t he f or ce and ef f ect of l aw?

a. Pr ocedur al Regul at i ons. b. Fi nal i zed Regul at i ons. *c. Legi sl at i ve Regul at i ons. d. I nt er pr et i ve Regul at i ons. e. Al l of t he above.

231. Whi ch i t ems t el l t axpayer s t he I RS s r eact i on t o cer t ai n cour tdeci si ons?

a. Not i ces. b. Revenue Procedures. c. Revenue Rul i ngs. *d. Act i ons on Deci si ons. e. Legi sl at i ve Regul at i ons.

232. Whi ch cour t deci si on car r i es mor e wei ght ?

a. Feder al Di st r i ct Cour t .


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*b. Second Ci r cui t Cour t of Appeal s. c. Memorandum U. S. Tax Cour t deci si on. d. Smal l Cases Di vi si on of U. S. Tax Cour t . e. U. S. Cour t of Feder al Cl ai ms.

233. Whi ch company does not publ i sh ci t at or s f or t ax pur poses?

*a. J ohn Wi l ey & Sons. b. Commer ce Cl ear i ng House. c. Resear ch I nst i t ut e of Amer i ca. d. West l aw. e. Shepar d s.

234. Whi ch i s not a pr i mary sour ce of t ax l aw?

a. Not i ce 89- 99, 1989- 2 C. B. 422. b. Estate of Harry Holmes v. Comm., 326 U. S. 480 (1946) . c. Rev. Rul . 79- 353, 1979- 2 C. B. 325. d. Pr op. Reg. 1. 752- 4T( f ) . *e. Al l of t he above are pr i mar y sour ces.

235. Whi ch st atement i s incorrect wi t h respect t o taxat i on on the CPAexam?

a. The CPA exam now has onl y f our par t s. *b. There ar e no l onger case st udi es on t he exam. c. A candi dat e may not go back af t er exi t i ng a t est l et . d. Si mul at i ons i ncl ude a f our - f unct i on pop- up cal cul at or . e. None of t he above ar e i ncor r ect .

236. How can Congressi onal commi t t ee repor t s be used by a t axr esear cher?

Corr ect Answer:Congr essi onal commi t t ee repor t s of t en expl ai n the pr ovi si ons ofpr oposed l egi sl at i on and ar e a val uabl e sour ce of ascer t ai ni ng t hei nt ent of Congr ess. The i nt ent of Congr ess i s t he key t o i nt er pr et i ngnew l egi sl at i on by t axpayer s, especi al l y bef or e Regul at i ons ar e

publ i shed.

237. What are Tr easur y Depar t ment Regul at i ons?

Corr ect Answer:Regul at i ons ar e i ssued by t he U. S. Tr easur y Depart ment under aut hori t ygr ant ed by Congr ess. I nt er pr et i ve by natur e, t hey pr ovi de t axpayer swi t h consi der abl e gui dance on t he meani ng and appl i cat i on of t he Code.Regul at i ons may be i ssued i nproposed, temporary, or final f or m.Regul at i ons car r y consi der abl e aut hor i t y as t he of f i ci al i nt er pr et at i on


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of t ax st at ut es. They ar e an i mpor t ant f act or t o consi der i n compl yi ngwi t h t he t ax l aw. Cour t s gener al l y i gnore Pr oposed Regul at i ons.

238. Compar e Revenue Rul i ngs wi t h Revenue Pr ocedures.

Corr ect Answer:Revenue Rul i ngs are of f i ci al pr onouncement s of t he Nat i onal Of f i ce oft he I RS. They t ypi cal l y pr ovi de one or more exampl es of how t he I RSwoul d appl y a l aw t o speci f i c f act si t uat i ons. Li ke Regul at i ons,Revenue Rul i ngs are desi gned to pr ovi de i nt er pr et at i on of t he tax l aw.However , t hey do not car r y t he same l egal f orce and ef f ect asRegul at i ons and usual l y deal wi t h more r est r i ct ed pr obl ems. Regul at i onsare appr oved by t he Secretary of t he Tr easury, wher eas Revenue Rul i ngsgener al l y ar e not .

Revenue Procedures are issued in the same manner as Revenue Rulings, but

deal with the internal management practices and procedures of the IRS.

Familiarity with these procedures can increase taxpayer compliance and help

the IRS administer the tax laws more efficiently. A taxpayers failure to

follow a Revenue Procedure can result in unnecessary delay or, in a

discretionary situation, can cause the IRS to decline to act on behalf of

the taxpayer.

239. What i s a Techni cal Advi ce Memor andum?

Corr ect Answer:The Nat i onal Of f i ce of t he I RS r el eases Techni cal Advi ce Memor anda

( TAMs) weekl y. TAMs r esembl e l et t er r ul i ngs i n that t hey gi ve t he I RS sdet er mi nat i on of an i ssue. However , t hey di f f er i n sever al r espect s.Let t er r ul i ngs deal wi t h pr oposed t r ansact i ons and ar e i ssued t ot axpayer s at t hei r r equest . I n cont r ast , TAMs deal wi t h compl et edt r ansact i ons. Fur t her mor e, TAMs ar i se f r om quest i ons r ai sed by I RSper sonnel dur i ng audi t s and ar e i ssued by t he Nat i onal Of f i ce of t heI RS t o i t s f i el d per sonnel . TAMs ar e of t en r equest ed f or quest i onsr el at i ng to exempt organi zat i ons and empl oyee pl ans. TAMs ar e notof f i ci al l y publ i shed and may not be ci t ed or used as pr ecedent .

240. Di scuss t he advant ages and di sadvant ages of t he Smal l Cases

Di vi si on of t he U. S. Tax Cour t .

Corr ect Answer:Ther e i s no appeal f r om t he Smal l Cases Di vi si on. The j ur i sdi ct i on oft he Smal l Cases Di vi si on i s l i mi t ed t o cases i nvol vi ng amount s of$50, 000 or l ess. The pr oceedi ngs of t he Smal l Cases Di vi si on ar ei nf or mal ( e. g. , no necessi t y f or t he taxpayer t o be r epr esent ed by al awyer or other t ax advi ser ) . Speci al t r i al j udges rat her t han TaxCour t j udges pr esi de over t hese pr oceedi ngs. The deci si ons of t heSmal l Cases Di vi si on are not pr ecedent s f or any ot her cour t deci si onand are not r evi ewabl e by any hi gher cour t . Proceedi ngs can be more


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t i mel y and l ess expensi ve i n t he Smal l Cases Di vi si on. Some of t hesecases can now be f ound on t he U. S. Tax Cour t I nternet Websi t e.

241. Di st i ngui sh bet ween t he j ur i sdi ct i on of t he U. S. Tax Cour t and aU. S. Di str i ct Court .

Corr ect Answer:The U. S. Tax Cour t hears onl y t ax cases and i s t he most popul ar t axf or um. The U. S. Di st r i ct Cour t hear s a wi de var i et y of nont ax cases,i ncl udi ng dr ug cr i mes and ot her Feder al vi ol at i ons, as wel l as t axcases. Some Tax Cour t j ust i ces have been appoi nt ed f r omI RS or Tr easuryDepart ment posi t i ons. For t hese reasons, some peopl e suggest t hat t heU. S. Tax Cour t has more expert i se i n t ax mat t ers.

242. How do t r eat i es f i t wi t hi n t ax sour ces?

Corr ect Answer:The U. S si gns cer t ai n t ax t r eat i es ( somet i mes cal l ed t ax convent i ons)wi t h f or ei gn count r i es t o r ender mut ual assi st ance i n t ax enf or cementand t o avoi d doubl e t axat i on. Tax l egi sl at i on enact ed i n 1988 pr ovi dedt hat nei t her a t ax l aw nor a t ax t r eaty takes general pr ecedence. Thus,when t her e i s a di r ect conf l i ct wi t h t he Code and a t r eat y, t he mostr ecent i t em wi l l t ake pr ecedence. A t axpayer must di scl ose on the t axr et ur n any posi t i on wher e a t r eat y over r i des a t ax l aw. Ther e i s a$1, 000 penal t y per f ai l ur e t o di scl ose f or i ndi vi dual s and a $10, 000per f ai l ur e penal t y f or cor por at i ons.

243. Under t he Feder al i ncome t ax f or mul a f or i ndi vi dual s, a choi cemust be made between cl ai mi ng deduct i ons for AGI and i t emi zeddeduct i ons.

a. Tr ue*b. Fal se

244. Under t he Feder al i ncome t ax f or mul a f or i ndi vi dual s, t hedetermi nat i on of adj ust ed gr oss i ncome (AGI ) pr ecedes t hat of t axabl ei ncome ( TI ) .

*a. Tr ue

b. Fal se

245. Under t he i ncome tax f ormul a, a taxpayer must choose bet weendeduct i ons for AGI and t he st andard deduct i on.

a. Tr ue*b. Fal se


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246. Af t er El l i e moves out of t he apart ment she had r ent ed as herpersonal r esi dence, she r ecover s her damage deposi t of $1, 000. The$1, 000 i s not i ncome t o El l i e.

*a. Tr ueb. Fal se

247. An above t he l i ne deduct i on r ef ers t o a deduct i on for AGI .

*a. Tr ueb. Fal se

248. Because t hey appear on page 1 of Form 1040, i t emi zed deduct i onsar e al so ref er r ed to as page 1 deduct i ons.

a. Tr ue

*b. Fal se

249. A decrease i n a t axpayer s AGI coul d i ncrease t he amount ofmedi cal expenses t hat can be deduct ed.

*a. Tr ueb. Fal se

250. An i ncr ease i n a t axpayer s AGI coul d decrease t he amount ofchar i t abl e cont r i but i on that can be cl ai med.

a. Tr ue*b. Fal se

251. Adj ust ed gross i ncome ( AGI ) appear s at t he bot t om of page 1 and att he t op of page 2 of For m 1040.

*a. Tr ueb. Fal se

252. Al l excl usi ons f r om gr oss i ncome ar e repor t ed on For m 1040.

a. Tr ue*b. Fal se

253. The f i l i ng st at us of a t axpayer ( e. g. , si ngl e, head of househol d)must be i dent i f i ed bef or e t he appl i cabl e st andar d deduct i on i sdetermi ned.


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*a. Tr ueb. Fal se

254. Lee, a ci t i zen of Kor ea, i s a r esi dent of t he U. S. Any rent i ncomeLee recei ves f r om l and he owns i n Kor ea is not subj ect t o t he U. S.i ncome tax.

a. Tr ue*b. Fal se

255. The addi t i onal st andard deduct i on f or age and bl i ndness i s gr eaterf or mar r i ed t axpayer s t han f or si ngl e t axpayer s.

a. Tr ue*b. Fal se

256. The basic and additional st andar d deduct i ons bot h are subj ect t oan annual adj ust ment f or i nf l at i on.

*a. Tr ueb. Fal se

257. Many taxpayers who pr evi ousl y i t emi zed wi l l st ar t cl ai mi ng t hest andar d deduct i on when t hey pur chase a home.

a. Tr ue

*b. Fal se

258. Once t hey r each age 65, many t axpayer s wi l l swi t ch f r om i t emi zi ngt hei r deduct i ons from AGI and st art cl ai mi ng t he st andard deduct i on.

*a. Tr ueb. Fal se

259. Cl aude s deduct i ons from AGI exceed t he st andar d deduct i on al l owedf or 2013. Under t hese ci r cumst ances, Cl aude cannot cl ai m t he st andar d

deduct i on.

south-western federal taxation 2014 individual income taxes, 37th edition

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