Income Tax Chapt 1 & 2 Exam 1 Review

Which, if any, of the following statements best describes the history of the Federal income tax? a. It did not exist during the Civil War. b. The Federal income tax on individuals was held by the U.S. Supreme Court to be allowable under the U.S. Constitution. c. The Federal income tax on corporations 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 these choices are correct.

The Federal income tax on corporations was held by the U.S. Supreme Court to be allowable under the U.S. Constitution.

What is the purpose of the unified transfer tax credit?

To eliminate the tax on modest gifts and estates.

Burt and Lisa are married and live in a common law state. Burt wants to make gifts to their four children in 2017. What is the maximum amount of the annual exclusion they will be allowed for these gifts? a. $14,000 b. $112,000 c. $28,000 d. $56,000 e. None of these choices are correct.

4 (number of donees) × $14,000 (annual exclusion) × 2 (number of donors) = $112,000. It is assumed that Lisa will make the election to split the gifts.

Several years ago, Ethan purchased the former parsonage of St. James Church to use as a personal residence. To date, Ethan has not received any ad valorem property tax bills from either the city or the county tax authorities. a. Ethan is allowed to use the tax-exempt status for ad valorem taxes for five years after the purchase. b. The parsonage probably was not listed on the property tax rolls, because it was owned by a tax-exempt church. c. The parsonage remains tax-exempt, since the original use was by a tax-exempt entity.

A = False B = True C = False

The commissioners for Walker County are actively negotiating with Falcon Industries regarding the location of a new manufacturing plant in the area. As Falcon is considering several other sites, a "generous tax holiday" may be needed to influence the final choice. The local school district is opposed to any "generous tax holiday." a. What would probably be involved in a generous tax holiday?

Ad Valorem Taxes

What is the difference between an excise tax and a general sales tax?

An excise tax is limited to a particular transaction, while a general sales tax covers a multitude of transactions.

Which, if either, does the Federal government impose? (estate & inheritance)

Estate Tax only

The school district would only get a percentage of the tax holiday funds. T/F

False

Differentiate a "piggyback" approach and "decoupling".

For state income tax purposes, "piggyback" means applying a rate to the Federal income tax liability . By "decoupling," a state decides not to allow a particular Federal provision (e.g., exclusion, deduction, credit) for state income tax purposes.

Distinguish between an estate tax and an inheritance tax.

If the tax is imposed on the right to pass property at death , it is classified as an estate tax. If it taxes the right to receive property from a decedent , it is termed an inheritance tax.

The Grays live in Clay County, which is adjacent to Jackson County. Although the retail stores in both counties are comparable, the Grays usually drive a few extra miles to shop in Jackson County. As to why the Grays might do this, complete each statement based on the scenarios below: a. Clay County is in a different state than Jackson County. Jackson County must be in a state that imposes a ___________ sales tax. Clay County must be a county with a _________ sales tax.

Lower / Higher

Do all states impose a general sales tax?

No

Does the Federal government impose a general sales tax?

No

Due to the erosion of the tax base, less revenue would be forthcoming to the school district? T/F

True

New workers would mean new families and more children to educate. F/F

True

Does the use of the credit for a gift affect the amount of credit available for the estate tax?

Yes

Is the same amount available for both the Federal gift tax and the estate tax?

Yes

Do some states impose both? (Estate Tax & Inheritance)

Yes, both may be imposed

During a social event, Muriel and Earl are discussing the home computer each recently purchased. Although the computers are identical makes and models, Muriel is surprised to learn that she paid a sales tax, while Earl did not. a.) Earl purchased his computer on sale. b. Earl purchased his computer from a large retail chain store in town. c. Earl purchased his computer through an out-of-state mail-order business or on the Internet.

a = No b = No c = Yes

When searching on an electronic (online) tax service, which approach is more frequently used? a. Keyword approach b. Index c. Internal Revenue Code section approach d. Table of contents approach e. All of these choices are about the same.

a. Keyword approach

Which publisher offers the United States Tax Reporter? a. Research Institute of America (Thomson Reuters) b. Commerce Clearing House c. LexisNexis d. Tax Analysts e. None of these choices are correct.

a. Research Institute of America (Thomson Reuters)

Taxes not imposed by the Federal government include: a. Tax on rental cars. b. Tobacco excise tax. c. Customs duties (tariffs on imports). d. Gas guzzler tax. e. None of these choices are correct.

a. Tax on rental cars. The Federal government imposes an excise tax on tobacco ("Tobacco excise tax"), customs duties ("Customs duties (tariffs on imports)"), and a gas guzzler tax ("Gas guzzler tax"). It does not impose a tax on rental cars ("Tax on rental cars").

A taxpayer who loses in a U.S. District Court may appeal directly to the: a. U.S. Circuit Court of Appeals. b. U.S. Supreme Court. c. U.S. Tax Court. d. U.S. Court of Federal Claims. e. All of these choices are correct.

a. U.S. Circuit Court of Appeals.

If a taxpayer decides not to pay a tax deficiency, he or she must go to which court? a. U.S. Tax Court b. U.S. Court of Federal Claims c. U.S. District Court d. Appropriate U.S. Circuit Court of Appeals e. None of these choices are correct.

a. U.S. Tax Court

Calculator Which is presently not a major tax service? a.Federal Taxes b.Standard Federal Tax Reporter c.United States Tax Reporter d.Tax Management Portfolios e. All of these choices are major tax services.

a.Federal Taxes

Which of the following indicates that a decision has precedential value for future cases? a.Stare decisis b. Reenactment doctrine c.En banc d.Golsen doctrine e. None of these choices are correct.

a.Stare decisis

Which, if any, of the following transactions will decrease a taxing jurisdiction's ad valorem tax revenue imposed on real estate? a. A public school is razed and turned into a city park. b. A tax holiday is granted to an out-of-state business that is searching for a new factory site. c. A local university sells a dormitory that will be converted for use as an apartment building. d. An abandoned church is converted to a restaurant. e. None of these choices are correct.

b. A tax holiday is granted to an out-of-state business that is searching for a new factory site.

Which publisher offers the Standard Federal Tax Reporter? a. LexisNexis b. Commerce Clearing House c. Research Institute of America d. Thomson Reuters e. None of these choices are correct.

b. Commerce Clearing House

Calculator A characteristic of FUTA is that: a. It is imposed on both employer and employee. b. Compliance requires following guidelines issued by both state and Federal regulatory authorities. c. It is applicable to spouses of employees but not to any children under age 18. d. It is imposed solely on the employee. e. None of these choices are correct.

b. Compliance requires following guidelines issued by both state and Federal regulatory authorities. FUTA is imposed only on the employer ("It is imposed on both employer and employee" and "It is imposed solely on the employee"). "It is applicable to spouses of employees but not to any children under age 18" refers to FICA. Because the administration of FUTA is shared by Federal and state governments, employers must comply with the rules issued by each ("Compliance requires following guidelines issued by both state and Federal regulatory authorities").

Which, if any, of the following taxes are proportional (rather than progressive)? a. Federal corporate income tax b. State general sales tax c. Federal gift tax d. Federal estate tax e. All of these choices are correct.

b. State general sales tax Sales taxes are applied at a constant rate that does not progress

State income taxes generally can be characterized by: a. No provision for withholding procedures. b. The same date for filing as the Federal income tax. c. Allowance of a deduction for Federal income taxes paid. d. Applying only to individuals and not applying to corporations. e. None of these choices are correct.

b. The same date for filing as the Federal income tax.

Calculator 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 these choices are correct.

b. The tax on automobiles sometimes considers the age of the vehicle.

Property can be transferred within the family group by gift or at death. One motivation for preferring the gift approach is: a. To take advantage of the higher unified transfer tax credit available under the gift tax. b. To take advantage of the per donee annual exclusion. c. To shift income to higher bracket donees. d. To avoid a future decline in value of the property transferred. e. None of these choices are correct.

b. To take advantage of the per donee annual exclusion.

Calculator Taxes levied by all states include: a. Individual income tax. b. Tobacco excise tax. c. General sales tax. d. Inheritance tax. e. None of these choices are correct.

b. Tobacco excise tax. All states impose a tobacco excise tax ("Tobacco excise tax"). Most states impose individual income taxes ("Individual income tax") and general sales taxes ("General sales tax"), and only some states impose inheritance taxes ("Inheritance tax").

Indicate which, if any, statement is incorrect. State income taxes: a. Can provide occasional amnesty programs. b. Can piggyback to the Federal version. c. Cannot apply to visiting nonresidents. d. Can decouple from the Federal version. e. None of these choices are correct.

c. Cannot apply to visiting nonresidents. Many states piggyback to the Federal system ("Can piggyback to the Federal version"). Some states, due to revenue shortfalls, have decoupled from various provisions of the Federal version ("Can decouple from the Federal version"). The "jock tax," although much criticized, is very much in being ("Cannot apply to visiting nonresidents"). Some states have had more than one amnesty period ("Can provide occasional amnesty programs").

A VAT (value added tax): a. Has not proved popular outside of the U.S. b. Is not a tax on consumption. c. Is regressive in its effect. d. Is used exclusively by third world (less developed) countries. e. None of these choices are correct.

c. Is regressive in its effect. Both the VAT and a general sales tax are taxes on consumption ("Is not a tax on consumption") and are regressive in effect ("Is regressive in its effect"). The VAT has been adopted by many countries ("Has not proved popular outside of the U.S".), many of which (e.g., Japan, Denmark) are not third world countries ("Is used exclusively by third world (less developed) countries").

Calculator A use tax is imposed by: a. The Federal government and a majority of the states. b. The Federal government and all states. c. Most of the states and not the Federal government. d. All states and not the Federal government. e. None of these choices are correct.

c. Most of the states and not the Federal government.

A taxpayer may not appeal a case from which court: a. U.S. Court of Federal Claims. b. U.S. Circuit Court of Appeals. c. Small Case Division of the U.S. Tax Court. d. U.S. District Court. e. None of these choices are correct.

c. Small Case Division of the U.S. Tax Court.

The IRS will not acquiesce to the following tax decisions: a. U.S. Court of Federal Claims. b. U.S. District Court. c. Small Case Division of the U.S. Tax Court. d. U.S. Tax Court. e. All of these choices are correct.

c. Small Case Division of the U.S. Tax Court.

Calculator 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 bankrupt motel is acquired by the Red Cross and is to be used to provide housing for homeless persons. b. A large property owner issues a conservation easement as to some of her land. c. A resident dies and leaves his farm to his church. d. A tax holiday issued 10 years ago has expired. e. None of these choices are correct.

d. A tax holiday issued 10 years ago has expired.

Calculator The U.S. (either Federal, state, or local) does not impose: a. Severance taxes. b. Franchise taxes. c. Custom duties. d. Export duties. e. Occupational fees.

d. Export duties.

A jury trial is available in the following trial court: a. U.S. Court of Federal Claims. b. U.S. Circuit Court of Appeals. c. U.S. Tax Court. d. U.S. District Court. e. None of these choices are correct.

d. U.S. District Court

The proposed flat tax: a. Would eliminate the income tax. b. Would tax the increment in value as goods move through the production and manufacturing stages to the marketplace. c. Is a tax on consumption. d. Would simplify the income tax. e. None of these choices are correct

d. Would simplify the income tax.

Calculator Federal excise taxes that are no longer imposed include: a. Tax on alcohol. b. Tax on air travel. c. Tax on the manufacture of sporting equipment. d. Tax on wagering. e. None of these choices are correct.

e. None of these choices are correct.

Calculator Taxes levied by both states and the Federal government include: a. Franchise tax. b. Hotel occupancy tax. c. General sales tax. d. Custom duties. e. None of these choices are correct.

e. None of these choices are correct. "General sales tax", "Hotel occupancy tax", and "Franchise tax" are levied at the state or local level. "Custom duties" is strictly a Federal levy.

A characteristic of FICA is that: a. It is imposed only on the employer. b. It provides a modest source of income in the event of loss of employment. c. It does not apply when one spouse works for the other spouse. d. It is administered by both state and Federal governments. e. None of these choices are correct.

e. None of these choices are correct. FICA is imposed on both the employer and the employee ("It is imposed only on the employer"). Spouses who work for each other are not exempt from the tax ("It does not apply when one spouse works for the other spouse"). Its objective is retirement income, not loss of employment ("It provides a modest source of income in the event of loss of employment"). It is administered only by the Federal government ("It is administered by both state and Federal governments").

Which, if any, is not one of Adam Smith's canons (principles) of taxation? a. Certainty b. Equality c. Convenience of payment d. Economy in collection e. Simplicity

e. Simplicity