1. The ratification of the Sixteenth Amendment to the U. S. Constitution was necessary to validate the Federal income tax on individuals. *a. True b. False 2. Before the Sixteenth Amendment to the Constitution was ratified, there was no valid Federal income tax on individuals. a. True *b. False 3. The first income tax on individuals (after the ratification of the Sixteenth Amendment to the Constitution) levied tax rates from a low of 2% to a high of 6%. *a. True b. False 4. The Federal income tax on corporations generates more revenue than the Federal income tax on individuals. a. True *b.
False 5. The pay-as-you-go feature of the Federal income tax on individuals conforms to Adam Smith’s canon of convenience. *a. True b. False 6. Although the law is complicated, most individual taxpayers are able to complete their Federal income tax returns without outside assistance. a. True *b. False 7. The FICA tax (Medicare component) on wages is progressive since the tax due increases as wages increase. a. True *b. False 8. The Federal estate and gift taxes are examples of progressive taxes. *a. True b. False 9. The Federal excise tax on cigarettes is an example of a proportional tax.
*a. True b. False 10. Currently, the Federal income tax is more progressive than it ever has been in the past. a. True *b. False 11. 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. *a. True b. False 12. A fixture will be subject to the ad valorem tax on personalty rather than the ad valorem tax on realty. a. True *b. False 13. Even if property tax rates are not changed, the ad valorem taxes imposed on realty may not remain the same. *a. True b. False.
14. The ad valorem tax on business use personalty is more often avoided by taxpayers than the ad valorem tax on personal use personalty. a. True *b. False 15. Federal excise tax is no longer imposed on cosmetics. *a. True b. False 16. The tax on hotel occupancy is subject to both Federal and state excise taxes. a. True *b. False 17. The Federal gas-guzzler tax applies only to automobiles manufactured overseas and imported into the U. S. a. True *b. False 18. Like the Federal counterpart, the amount of the state excise taxes on gasoline do not vary from state to state. a. True *b. False 19.
The states that impose a general sales tax also have a use tax. *a. True b. False 20. Sales made by mail order are not exempt from the application of a general sales (or use) tax. *a. True b. False 21. Two persons who live in the same state but in different counties may not be subject to the same general sales tax rate. *a. True b. False 22. States impose either a state income tax or a general sales tax, but not both types of taxes. a. True *b. False 23. A safe and easy way for a taxpayer to avoid local and state sales taxes is to have the purchase sent to an address in another state that levies no such taxes.
a. True *b. False 24. On transfers by death, the Federal government relies on an estate tax, while states use only an inheritance tax. a. True *b. False 25. An inheritance tax is a tax on a decedent’s right to pass property at death. a. True *b. False 26. 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. *a. True b. False 27. 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 2011. *a. True b. False 28.
Under a state inheritance tax, two heirs, a cousin and a son of the deceased, would be taxed at the same rate. a. True *b. False 29. The annual exclusion, currently $13,000, is available for gift but not estate tax purposes. *a. True b. False 30. In 2011, Jose, a widower, sells land (fair market value of $100,000) to his daughter, Linda, for $50,000. Jose has made a taxable gift of $37,000. *a. True b. False 31. Julius, a married taxpayer, makes gifts to each of his six children. A maximum of six annual exclusions could be allowed as to these gifts. a. True *b. False 32. One of the motivations for making a gift is to save on income taxes.
*a. True b. False 33. The formula for the Federal income tax on corporations is not the same as that applicable to individuals. *a. True b. False 34. A state income tax can be imposed on nonresident taxpayers who earn income within the state or on an itinerant basis. *a. True b. False 35. For state income tax purposes, all states allow a deduction for Federal income taxes. a. True *b. False 36. Some states use their state income tax return as a means of collecting unpaid sales and use taxes. *a. True b. False 37. No state has offered an income tax amnesty program more than once. a. True *b.
False 38. For Federal income tax purposes, there never has been a general amnesty period. *a. True b. False 39. Under state amnesty programs, all delinquent and unpaid income taxes are forgiven. a. True *b. False 40. When a state decouples from a Federal tax provision, it means that this provision will not apply for state income tax purposes. *a. True b. False 41. The principal objective of the FICA tax is to provide some measure of retirement security. *a. True b. False 42. Currently, the tax base for the Medicare component of the FICA is not limited to a dollar amount. *a. True b. False 43.
A parent employs his twin daughters, age 19, in his sole proprietorship. The daughters are not subject to FICA coverage. a. True *b. False 44. Unlike FICA, FUTA requires that employers comply with state as well as Federal rules. *a. True b. False 45. A major disadvantage of a flat tax type of income tax is its complexity. a. True *b. False 46. The value added tax (VAT) has had wide acceptance in the international community. *a. True b. False 47. Recently, more IRS audits are producing a greater number of no change results. This indicates increased compliance on the part of taxpayers. a. True *b. False 48.
The amount of a taxpayer’s itemized deductions will increase the chance of being audited by the IRS. *a. True b. False 49. In a field audit, the audit by the IRS takes place at the office of the IRS. a. True *b. False 50. The IRS agent auditing the return will issue an RAR even if the taxpayer owes no additional taxes. *a. True b. False 51. If a “special agent” becomes involved in the audit of a return, this indicates that the IRS suspects that fraud is involved. *a. True b. False 52. If a taxpayer files early (i. e. , before the due date of the return), the statute of limitations on assessments begins on the date the return is filed. a. True.
*b. False 53. For omissions from gross income in excess of 25% of that reported, there is no statute of limitations on additional income tax assessments by the IRS. a. True *b. False 54. If an income tax return is not filed by a taxpayer, there is no statute of limitations on assessments of tax by the IRS. *a. True b. False 55. If fraud is involved, there is no time limit on the assessment of a deficiency by the IRS. *a. True b. False 56. The IRS is required to redetermine the interest rate on underpayments and overpayments once a year. a. True *b. False 57. A calendar year taxpayer files his 2010 Federal income tax return on March 3, 2011.
The return reflects an overpayment of $6,000, and the taxpayer requests a refund of this amount. The refund is paid on May 18, 2011. The refund must include interest. a. True *b. False 58. For individual taxpayers, the interest rate for income tax refunds (overpayments) is not the same as that applicable to assessments (underpayments). a. True *b. False 59. During any month in which both the failure to file penalty and the failure to pay penalty apply, the failure to file penalty is reduced by the amount of the failure to pay penalty. *a. True b. False 60. When interest is charged on a deficiency, any part of a month counts as a full month.
a. True *b. False 61. For the negligence penalty to apply, the underpayment must be caused by intentional disregard of rules and regulations with intent to defraud. a. True *b. False 62. Upon audit by the IRS, Faith is assessed a deficiency of $40,000 of which $25,000 is attributable to negligence. The 20% negligence penalty will apply to only $25,000. *a. True b. False 63. If the tax deficiency is attributable to fraud, the negligence penalty will not be imposed. *a. True b. False 64. The civil fraud penalty can entail large fines and possible incarceration. a. True *b. False 65.
Even though a client refuses to correct an error on a past return, it may be possible for a practitioner to continue to prepare returns for the client. *a. True b. False 66. In preparing an income tax return, the use of a client’s estimates is permitted. *a. True b. False 67. In preparing a tax return, all questions on the return must be answered. a. True *b. False 68. A CPA firm in California sends many of its less complex tax returns to be prepared by a group of accountants in India. If certain procedures are followed, this outsourcing of tax return preparation is proper. *a. True.
b. False 69. The objective of pay-as-you-go (paygo) is to achieve revenue neutrality. *a. True b. False 70. When Congress enacts a tax cut that is phased in over a period of years, revenue neutrality is achieved. a. True *b. False 71. A tax cut enacted by Congress that contains a sunset provision will make the tax cut permanent. a. True *b. False 72. 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 social grounds. *a. True b. False 73.
Various tax provisions encourage the creation of certain types of retirement plans. Such provisions can be justified on both economic and equity grounds. a. True *b. False 74. 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. *a. True b. False 75. To mitigate the effect of the annual accounting period concept, the tax law permits the carryback and carryforward to other years of the net operating loss of a particular year. *a. True b. False 76.
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. *a. True b. False 77. Congress has enacted a provision to allow a deduction for state and local sales taxes. Such a provision can be justified on social grounds. a. True *b. False 78. 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 took place. a. True *b. False 79.
Stealth taxes have the effect of generating additional taxes from higher income taxpayers. *a. True b. False 80. 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. a. True *b. False 81. As a matter of administrative convenience, the IRS would prefer to have Congress increase (rather than decrease) the amount of the standard deduction allowed to individual taxpayers. *a. True b. False 82. In cases of doubt, courts have held that tax relief provisions should be narrowly construed against taxpayers.
*a. True b. False 83. On occasion, Congress has to enact legislation that clarifies the tax law in order to change a result reached by the U. S. Supreme Court. *a. True b. False 84. Which, if any, of the following statements best describes the history of the Federal income tax? *a. It existed during the Civil War. b. The Federal income tax on corporations was held by the U. S. Supreme Court to be contrary to the U. S. Constitution. c. The Federal income tax on individuals was held by the U. S. Supreme Court to be allowable under the U. S. Constitution. d. Both the Federal income tax on individuals and on corporations was held by the U.
S. Supreme Court to be contrary to the U. S. Constitution. e. None of the above. 85. Which, if any, is not one of Adam Smith’s canons of taxation? a. Economy. b. Certainty. *c. Simplicity. d. Convenience. e. Equality. 86. Which, if any, of the following taxes are proportional (rather than progressive)? a. Federal corporate income tax. *b. Federal employment taxes (i. e. , FICA, FUTA). c. Federal estate tax. d. Federal gift tax. e. All of the above. 87. 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. 88. 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 denied 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 buys an apartment building for use as a student dormitory. e. None of the above. 89. 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. 90.
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 jewelry. e. None of the above. 91. Taxes not imposed by the Federal government include: a. Tobacco excise tax. *b. Car rental tax. c. Customs duties (tariffs on imports). d. Gas guzzler tax. e. None of the above. 92. 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. 93. Taxes levied by all states include: *a. Liquor excise tax.
b. Individual income tax. c. Inheritance tax. d. General sales tax. e. None of the above. 94. 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. 95. Burt and Lisa are married and live in a common law state. Burt wants to make gifts to their five children in 2011. What is the maximum amount of the annual exclusion they will be allowed for these gifts? a. $0. b. $13,000. c. $26,000. d. $65,000. *e. $130,000.
96. 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 per donee annual exclusion. b. To avoid a future decline in value of the property transferred. c. To take advantage of the higher unified transfer tax credit available under the gift tax. d. To shift income to higher bracket donees. e. None of the above. 97. Indicate which, if any, statement is incorrect. State income taxes: a. Can piggyback to the Federal version. b. Can decouple from the Federal version. c. Can apply to visiting nonresidents.
d. Can provide occasional amnesty programs. *e. None of the above. 98. State income taxes generally can be characterized by: a. A different date for filing than the Federal income tax. *b. 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. 99. A characteristic of FICA is that: *a. It applies 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. 100. 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. 101. The U. S. (either Federal, state, or local) does not impose: a. Franchise taxes. b. Severance taxes. c. Occupational fees. *d. Export duties. e. Customs duties. 102.
The proposed flat tax: a. Would eliminate the income tax. *b. Would simplify the income tax. c. Would tax the increment in value as goods move through the production and manufacturing stages to the marketplace. d. Is a tax on consumption. e. None of the above. 103. A VAT (value added tax): *a. Is regressive in its effect. b. Has not proved popular outside of the U. S. c. Is not a tax on consumption. d. Is used exclusively by third world (less developed) countries. e. None of the above. 104. Characteristics of the “Fair Tax” (i. e. , national sales tax) include which, if any, of the following: a.
Abolition of the Federal individual (but not the corporate) income tax. b. Abolition of all Federal income taxes but retention of payroll taxes (including the self-employment tax). c. Abolition of all Federal income taxes and payroll taxes but retention of the Federal estate and gift taxes. *d. Abolition of all Federal income and payroll taxes as well as the Federal estate and gift taxes. e. None of the above. 105. In terms of probability, which of the following taxpayers would be least likely to be audited by the IRS? a. Taxpayer owns and operates a check-cashing service. *b. Taxpayer is an employed electrician.
c. Taxpayer just received a $3 million personal injury award as a result of a lawsuit. d. Taxpayer just won a $1 million slot machine jackpot at a Las Vegas casino. e. Taxpayer has been audited several times before. 106. Which of the following is a characteristic of the audit process? a. Most taxpayer audits involve “special” agents. b. Self-employed taxpayers are less likely to be selected for audit than employed taxpayers. *c. Less important issues are handled by means of a correspondence audit. d. If a taxpayer disagrees with the IRS auditor’s finding, the only resort is to the courts. e. None of the above.
107. Scott files his tax return 65 days after the due date. Along with the return, Scott remits a check for $50,000 which is the balance of the tax owed. Disregarding the interest element, Scott’s total failure to file and to pay penalties are: a. $750. b. $6,000. *c. $7,500. d. $8,250. e. None of the above. 108. A characteristic of the fraud penalties is: a. Civil fraud can result in a fine and a prison sentence. *b. When negligence and civil fraud apply to a deficiency, the civil fraud penalty predominates. c. The criminal fraud penalty is 75% of the deficiency attributable to the fraud. d.
The IRS has the same burden of proof in the case of criminal fraud than with civil fraud. e. None of the above. 109. Regarding proper ethical guidelines, which (if any) of the following is correct? a. The use of client estimates in preparing a return is not acceptable. b. Under no circumstances should a question on a tax return be left unanswered. c. If a client has made a mistake in a prior year’s return and refuses to correct it, you should withdraw from the engagement. *d. If the exact amount of a deduction is not certain (e. g. , around mid-$600s) , it should not be recorded as an odd amount (i. e., $649) so as to increase the appearance of greater certainty. e. None of the above.
110. Both economic and social considerations can be used to justify: *a. Various tax credits, deductions, and exclusions that are designed to encourage taxpayers to obtain additional education. 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. Favorable tax treatment for accident and health plans provided for employees and financed by employers. d. Allowance of a deduction for state and local income taxes paid.
e. None of the above. 111. Social considerations can be used to justify: a. Allowing a Federal income tax deduction for state and local sales taxes. 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. Allowance of a credit for child care expenses. e. None of the above. 112. 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. 113. 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. 114. 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. 115. 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. 116. A landlord leases property upon which the tenant makes improvements. The improvements are significant and are not made in lieu of rent. At the end of the lease, the value of the improvements are not income to the landlord. This rule is an example of: a. A clear reflection of income result. b. The tax benefit rule. c. The arm’s length concept. *d. The wherewithal to pay concept. e. None of the above. 117. Match the statements that relate to each other. Note: Choice k may be used more than once.
[c] 1. Jock tax [d] 2. Decoupling [f] 3. DIF [g] 4. Tax fraud suspected [i] 5. Revenue neutrality [e] 6. RAR [h] 7. Wherewithal to pay concept [j] 8. Mitigation of the annual accounting period concept [k] 9. Tax on transfers at death (inheritance type) [a] 10. Excise tax on tobacco [b] 11. Use tax [k] 12. Income tax amnesty [f] 13. Tax deficiency assessed in prior years [i] 14. “Pay-as-you-go” (paygo) [a] 15. Export taxes a. No correct match provided b. Every state that has a general sales tax has one c. State income tax applied to visiting nonresident d. Undoing the “piggyback” result e.
“No change” is one possible result f. Criteria in the selection of tax returns for audit g. IRS special agent h. Deferral of gains from involuntary conversions i. Ideal budget goal as to new tax legislation j. Carryback and carryforward of net operating losses. k. Imposed by some states but not the Federal government 118. Match the statements that relate to each other. Note: Some choices may be used more than once. [h] 1. Office audit [g] 2. Field audit [c] 3. Failure to file penalty [a] 4. Failure to pay penalty [j] 5. Negligence penalty [d] 6. Civil fraud penalty [b] 7. Fraud and statute of limitations [e] 8.
Early filing and statute of limitations (deficiency situations) [k] 9. Late filing and statute limitations (deficiency situations) [b] 10. No return and statute limitations [i] 11. More than 25% gross income omission and statute of limitations [f] 12. Interest due on refund a. 0. 5% per month (25% limit) b. No statute of limitations (period remains open). c. 5% per month (25% limit) d. No correct match provided e. 3 years from due date of return f. 45-day grace period allowed to IRS g. Conducted at taxpayer’s office h. Conducted at IRS office i. 6 years j. 20% of underpayment k. 3 years from date return is filed 119.
Using the choices provided below, show the justification for each provision of the tax law listed. Note: In some cases, more than one answer is appropriate. [a] 1. A tax credit for amounts spent to furnish care for children while the parent is at work. [b] 2. Additional depreciation deduction allowed for the year the asset is acquired. [c] 3. Tax brackets are increased for inflation. [b] 4. A small business corporation can elect to avoid the corporate income tax. [b] 5. A deduction for contributions by an employee to certain retirement plans. [b] 6. A deduction for qualified tuition paid to obtain higher education.
[b] 7. A deduction for certain expenses (interest and taxes) incident to home ownership. [c] 8. A Federal deduction for state and local income taxes paid. [b] 9. A deduction for certain income from manufacturing activities. [a] 10. A bribe to the local sheriff, although business related, is not deductible. [a] 11. Contributions to charitable organizations are deductible. [c] 12. A Federal deduction for state and local sales taxes paid. [b] 13. Tax credits available for the purchase of a vehicle that uses alternative (non-fossil) fuels. [b] 14. Tax credits for home improvements that conserve energy. [b] 15.
More rapid expensing for tax purposes of the costs of installing pollution control devices a. Social considerations b. Economic considerations c. Equity considerations 120. Molly, a widow, makes cash gifts to her five married children (including their spouses) and to her eight grandchildren. a. |What is the maximum amount Molly can give for calendar year 2011 without using her unified transfer tax credit? | | | b. |What is the maximum amount Molly can give for calendar year 2011 also using her unified transfer tax credit? [Note: Molly has never made any prior taxable gifts. ]| || Correct Answer: a. |$234,000.
$13,000 (annual exclusion) ? 18 donees = $234,000. | | | b. |$5,234,000. $13,000 (annual exclusion) ? 18 donees = $234,000 + $5,000,000 (the exemption equivalent of a $1,730,800 credit) = $5,234,000. | || 121. For the tax year 2011, Sam reported gross income of $400,000 on his timely filed Federal income tax return. a. |Presuming the general rule applies, when does the statute of limitations on assessments normally expire? | b. |Suppose Sam inadvertently omitted gross income of $101,000. When does the statute of limitations on assessments expire? | c. |Suppose the omission was deliberate and not inadvertent.
When does the statute of limitations on assessments expire? | || Correct Answer: a. |Three years from April 16, 2012 (April 15 is a Sunday). | b. |If more than 25% of gross income is omitted, a six-year statute applies (i. e. , 6 years from April 16, 2012). Here, it does as $101,000 is more than $100,000 (25% ? $400,000). | c. |If fraud is involved, the statute never expires. | || 122. Without obtaining an extension, Lisa files her income tax return 45 days after the due date. With her return, she pays an additional tax of $40,000. Disregarding any interest element, what is Lisa’s penalty for failure to pay and to file?
Correct Answer: $7,500. Disregarding the interest element, Lisa’s total penalties are as follows: Failure to pay penalty (0. 5% ? $40,000 ? 2 months)| |$ 400| Plus:|Failure to file penalty (5% ? $40,000 ? 2 months)|$4,000 | | |Less failure to pay penalty for same period| (400)| 3,600| Total penalties| |$4,000| |||| 123. On his 2011 income tax return, James omitted income and overstated deductions to the extent that his income tax was understated by $300,000. Disregarding any interest element, what is James’ penalty if the understatement was due to: a. |Negligence. | b. |Civil fraud. | c.
|Criminal fraud. | || Correct Answer: a. |$60,000 (20% ? $300,000). | | | b. |$225,000 (75% ? $300,000). | | | c. |Various fines and/or prison sentence. | || 124. Several years ago, Ted purchased extra grazing land for his ranch at a cost of $40,000. In 2011, the land is condemned by the state for development as a highway maintenance depot. Under the condemnation award, Ted receives $100,000 for the land. Within the same year, he replaces the property with other grazing land. What is Ted’s tax situation if the replacement land cost: a. |$35,000? | b. |$60,000? | c. |$105,000? | d. |Why? | ||
Correct Answer: a. |The full realized gain of $60,000 [$100,000 (condemnation proceeds) – $40,000 (cost of land)] must be recognized, as only $35,000 was reinvested. The condemnation proceeds of $100,000 exceed the amount reinvested by more than $60,000. | b. |As only $60,000 was reinvested in replacement property, $40,000 ($100,000 – $60,000) of the gain must be recognized. | c. |As the full $100,000 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. | || 125.
Paige is the sole shareholder of Citron Corporation. During the year, Paige leases a building to Citron for a monthly rental of $80,000. If the fair rental value of the building is $60,000, what are the income tax consequences to the parties involved? Correct Answer: The rent charged by Paige is not “arms length”; as such, Citron Corporation’s rent deduction is $60,000 (not $80,000). The $20,000 difference is a nondeductible dividend distribution. For Paige, the change merely requires reclassification. Instead of $80,000 of rent income, she has $60,000 of rent income and $20,000 of dividend income.
126. In 1985, Roy leased real estate to Drab Corporation for 20 years. Drab Corporation made significant capital improvements to the property. In 2005, Roy decides not to renew the lease and vacates the property. At that time, the value of the improvements is $800,000. Roy sells the real estate in 2011 for $1,200,000 of which $900,000 is attributable to the improvements. How and when is Roy taxed on the improvements made by Drab Corporation? Correct Answer: Roy is not subject to taxation on the improvements until he disposes of the property (i. e. , 2011).
After a controversial Supreme Court decision years ago, Congress clarified the tax law to make it more consistent with the wherewithal to pay concept. 127. The Federal income tax is based on a pay-as-you-go system and has become a “mass tax. ” Explain this statement. Correct Answer: The pay-as-you-go system is present in the wage and other withholding procedures. In the case of self-employed persons, it is manifested in the required quarterly payments for estimated taxes. The income tax became a mass tax during World War II when its coverage was extended to 74% of the population (from less than 6% in 1939). 128.
In terms of Adam Smith’s canons of taxation, how does the Federal income tax fare as far as economy is concerned? Correct 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 efforts. 129. Timothy recently converted a warehouse into apartment lofts, which he is renting to single professionals. In making the conversion, he emphasized improvements that were portable in nature. Thus, the sprinkler system, heating and cooling units, and room dividers are all removable from the building. In terms of ad valorem property taxes.