AnIntroductiontoTaxation 11

CHAPTER 1

AN INTRODUCTION TO TAXATION
AND UNDERSTANDING THE FEDERAL TAX LAW

EXAMINATION QUESTIONS

____ 1. Lawrence buys a parsonage from a local church which he converts into a rental property.
This change should increase the amount of ad valorem property taxes levied on the
property.

____ 2. If a state imposes a general sales tax, it will have a use tax.

3. Kellan and Alaina are husband and wife and have two married children and four minor
grandchildren. If they elect to split the gifts, how much can they give their family
(including sons and daughters-in-law) during 2013 without making a taxable gift?
a. $14,000.
b. $28,000.
c. $112,000.
d. $224,000.
e. None of the above.

4. The Federal income tax applicable to corporations:

a. Allows a deduction for the standard deduction.
b. Requires the determination of adjusted gross income.
c. Requires the determination of taxable income.
d. Allows a deduction for personal exemptions.
e. All of the above.

5. Income taxation at the State level can be characterized by all of the following except:
a. Same due date as the Federal return for most states.
b. Withholding procedures are not required.
c. Taxation of income in most states.
d. Most states do not allow a deduction for Federal income taxes paid.
e. All of the above.

6. A characteristic of FICA is that:

a. It is imposed only on an employee.
b. A 16-year-old son who works for his parents is not covered.
c. Over the years both the base amount and the applicable rates have remained
constant.
d. It has two components made up of FICA and Medicade.
e. None of the above.
1-2 2014 Individual Edition

7. Which of the following is characteristic of the IRS audit process?

a. Every income tax return has a 1% chance of being audited by the IRS.
b. The IRS can pay up to 50% of any tax deficiency collected as a result of
information provided by an informer.
c. A field audit takes place at the office of the IRS.
d. The IRS may audit the same taxpayer more than once in a three year period.
e. None of the above.

8. Which of the following is not characteristic of the IRS audit procedure?

The percentage of individual income tax returns that the IRS audits has
significantly increased over the last five years.
An office audit takes place at the office of the taxpayer.
One of the factors that leads to an audit is the information provided by
informants.
IRS special agents are typically involved when fraud is suspected.
All of the above.

9. Taylor files his tax return 85 days after the due date. Along with the return, Taylor
remits a check for $40,000 which is the balance of the tax owed. Disregarding the
interest element, Taylors total failure to file and to pay penalties are:
$600.
$5,400.
$6,000.
$6,600.
e. None of the above.

10. Economic considerations can be used to justify:

a. The exclusion for accident and health plans.
b. The installment sales rules.
c. Deduction for research and experimental expenditures.
d. The tax treatment of prepaid subscription revenue.
e. None of the above.
 AnIntroductiontoTaxation 13

SOLUTIONS TO EXAMINATION QUESTIONS

1. T The parsonage was probably exempt from tax since it was owned by a church.
This conversion should bring about higher ad valorem taxes. p. 1-7

2. T Every state that has a general sales tax also has a use tax. There are no states with
only a sales tax. p. 1-10

3. d [$14,000 (Kellans annual exclusion) + $14,000 (Alainas annual exclusion)] X 8

donees X 1 year = $224,000. p. 1-13 and Example 10

4. c The Federal income tax applicable to individuals allows the deduction for personal
exemptions (choice d.), the standard deduction (choice a.), and requires the
determination of adjusted gross income (choice b.). The tax applicable to both
individuals and corporations requires the determination of taxable income (choice
c.). pp. 1-14 and 1-15

5. b Income is subject to tax in all but seven states (choice c.). Most states do have the
same filing date as for the Federal return (choice a.). Most states do require some
form of withholding procedure (choice b.). Most states do not allow a deduction
for Federal income taxes paid (choice d.). pp. 1-15 and 1-16

6. b A child under 18 who works for his or her parents is not covered (option b.).
FICA is imposed on both employer and employee (option a.). It has two
components, FICA and Medicare (option d.). Over the years, both the base
amounts and the rates have increased (option c.). p. 1-18

7. d The audit rate is about 1% but certain groups of taxpayers are audited more
frequentlythanothers(choicea.). TheIRSmaypayaninformerafeenotto
exceed30%ofanydeficiencycollected(choiceb.).Afieldaudittakesplaceat
theofficeofthetaxpayer(choicec.).TheIRSmayauditataxpayeragainifpast
auditswerefruitful(choiced.).pp.121and122

8. b The number of returns audited by the IRS has significantly increased recently
(choice a.). An office audit takes place at the office of the IRS (choice b.). The
participation of a special agent occurs when fraud is suspected-the type of audit
involved is immaterial (choice d). pp. 1-21 and 1-22

9. c Following the procedure set forth in Example 21, the penalty is determined as
follows:

Failure to pay penalty [1/2% X $40,000 X 3 (three months $600

violation)]
Plus: Failure to file penalty [5% X $40,000 X 3
(three months violation)] $6,000
Less: Failure to pay penalty (600) 5,400
Total penalties $6,000

Example 21
1-4 2014 Individual Edition

10. c The exclusion for accident and health plans are social considerations (options a.).
The installment sales rules are an equity consideration (option b.). The deduction
of research and experimental expenditures is based on economic considerations
(option c.). The tax treatment of prepaid subscription revenue is a political
consideration (option d). pp. 1-27 to 1-33