(Test Bank) South Western Federal Taxation

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Test Bank for South Western Federal Taxation, The downloadable file consists of 352 pages, and the total size of the file is 2.91 MB. Purchase now only for highly discounted price.

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1 Test Bank Income Tax CHAPTER 1: AN INTRODUCTION TO TAXATION AND UNDERSTANDING THE FEDERAL TAX LAW 1. The ratification of the Sixteenth Amendment to the U.S. Constitution was necessary to validate the Federal income tax on corporations. a. True b. False ANSWER: False RATIONALE: The Sixteenth Amendment validated only the tax on individuals. The income tax on corporations had been previously sanctioned by the courts. 2. Before the Sixteenth Amendment to the Constitution was ratified, there was no valid Federal income tax on individuals. a. True b. False ANSWER: False RATIONALE: There existed a Federal income tax during the Civil War that was sanctioned by the U.S. Supreme Court. 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 ANSWER: True 4. The Federal income tax on individuals generates more revenue than the Federal income tax on corporations. 2 a. True b. False ANSWER: True 5. The payasyougo feature of the Federal income tax on individuals conforms to Adam Smith’s canon of certainty. a. True b. False ANSWER: False RATIONALE: Pay-as-you-go refers to the withholding provisions applicable to wages and other types of income and adds convenience to the tax system. 6. Because the law is complicated, most individual taxpayers are not able to complete their Federal income tax returns without outside assistance. a. True b. False ANSWER: True RATIONALE: Approximately 60% use tax return preparers, while slightly more than 32% purchase tax return software. 7. The FICA tax (Medicare component) on wages is progressive since the tax due increases as wages increase. a. True b. False ANSWER: False RATIONALE: The FICA tax (Medicare component) is proportional because the rate is constant regardless of the wages earned. 3 8. The Federal estate and gift taxes are examples of progressive taxes. a. True b. False ANSWER: True 9. The Federal excise tax on cigarettes is an example of a proportional tax. a. True b. False ANSWER: True RATIONALE: The tax is a flat $1.01 per pack. 10. Currently, the Federal income tax is less progressive than it ever has been in the past. a. True b. False ANSWER: False RATIONALE: Currently, the Federal income tax has six rates. At one time, it had two rates. 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 ANSWER: True RATIONALE: Conversion from residential to rental use will increase the taxes. Furthermore, Mona’s mother may have had a senior citizen exemption on the property, which will no longer be appropriate. Lastly, the furnishings in the rent house could now be subject to an ad valorem tax on personalty. 4 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 ANSWER: False RATIONALE: By definition, a fixture becomes part of the real estate to which it is attached. 13. Even if property tax rates are not changed, the amount of ad valorem taxes imposed on realty may not remain the same. a. True b. False ANSWER: True RATIONALE: Property taxes will vary in accordance with changes in the assessed value of the property. 14. The ad valorem tax on personal use personalty is more often avoided by taxpayers than the ad valorem tax on business use personalty. a. True b. False ANSWER: True 15. A Federal excise tax is no longer imposed on admission to theaters. a. True b. False ANSWER: True RATIONALE: Such tax has been rescinded. 16. There is a Federal excise tax on hotel occupancy. 5 a. True b. False ANSWER: False 17. The Federal gas-guzzler tax applies only to automobiles manufactured overseas and imported into the U.S. a. True b. False ANSWER: False RATIONALE: No such restriction is imposed. Although many of the European luxury and sports car manufacturers were initially hit hard by the tax, the law is silent on this matter. 18. Like the Federal counterpart, the amount of the state excise taxes on gasoline varies from state to state. a. True b. False ANSWER: False RATIONALE: The Federal excise tax rate on gasoline remains constant. 19. Not all of the states that impose a general sales tax also have a use tax. a. True b. False ANSWER: False RATIONALE: Every state that has a general sales tax also has a use tax. There are no states with only a sales or use tax. 20. Sales made by mail order are not exempt from the application of a general sales (or use) tax. a. True 6 b. False ANSWER: True RATIONALE: They are not exempt but compliance is sporadic. 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 ANSWER: True RATIONALE: This possibility could exist if local jurisdictions exact additional sales taxes. 22. States impose either a state income tax or a general sales tax, but not both types of taxes. a. True b. False ANSWER: False RATIONALE: Many states impose both. 23. A safe and easy way for a taxpayer to avoid local and state sales taxes is to make the purchase in a state that levies no such taxes. a. True b. False ANSWER: False RATIONALE: A review of the Example 5 discussion shows that this may not always be successful. 24. On transfers by death, the Federal government relies on an estate tax, while states impose an estate tax, an inheritance tax, both taxes, or neither tax. 7 a. True b. False ANSWER: True RATIONALE: The Federal government relies on an estate tax while states impose an estate tax, an inheritance tax, both taxes, or neither tax. 25. An inheritance tax is a tax on a decedent’s right to pass property at death. a. True b. False ANSWER: False RATIONALE: What is described is an estate tax. An inheritance tax is a tax on an heir’s right to receive property from a decedent. 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 ANSWER: True 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 2014. a. True b. False ANSWER: True RATIONALE: A combination of the charitable and marital deductions will eliminate Clint’s taxable estate. 8 28. Under the usual state inheritance tax, two heirs, a cousin and a son of the deceased, would not be taxed at the same rate. a. True b. False ANSWER: True RATIONALE: The more closely related the heir is to the decedent, the larger the exemption allowed and/or the lower the tax rate imposed. 29. The annual exclusion, currently $14,000, is available for gift and estate tax purposes. a. True b. False ANSWER: False RATIONALE: The annual exclusion is not available for estate tax purposes. 30. In 2014, José, a widower, sells land (fair market value of $100,000) to his daughter, Linda, for $50,000. José has not made a taxable gift. a. True b. False ANSWER: False RATIONALE: $100,000 (value of land) – $50,000 (consideration received) – $14,000 (per donee annual exclusion) = $36,000 (taxable gift). 31. Julius, a married taxpayer, makes gifts to each of his six children. A maximum of twelve annual exclusions could be allowed as to these gifts. a. True b. False ANSWER: True 9 RATIONALE: If Julius can obtain the consent of his wife to make the election to split the gifts, twelve per donee annual exclusions are available. 32. One of the motivations for making a gift is to save on income taxes. a. True b. False ANSWER: True RATIONALE: This presumes that income -producing property is involved and that the donee is in a lower tax bracket than the donor. 33. The formula for the Federal income tax on corporations is the same as that applicable to individuals. a. True b. False ANSWER: False RATIONALE: For example, an AGI determination is required only for individual taxpayers. 34. A state income tax can be imposed on nonresident taxpayers who earn income within the state on an itinerant basis. a. True b. False ANSWER: True RATIONALE: Highlypaid taxpayers (e.g., entertainers, athletes) are often subject to a state’s income tax. The socalled “jock tax” has been criticized since it singles out highlypaid a nd well known personalities and is not imposed on the average business traveler. 35. For state income tax purposes, a majority of states allow a deduction for Federal income taxes. a. True b. False 10 ANSWER: False RATIONALE: Only a minority allow the deduction. 36. Some states use their state income tax return as a means of collecting unpaid sales and use taxes. a. True b. False ANSWER: True RATIONALE: Often a table is provided that suggests an amount to be used. 37. No state has offered an income tax amnesty program more than once. a. True b. False ANSWER: False RATIONALE: One state has had at least four. 38. For Federal income tax purposes, there never has been a general amnesty period. a. True b. False ANSWER: True RATIONALE: Limited amnesty has been made available as to various tax penalties in certain tax shelter situations. 39. Under state amnesty programs, all delinquent and unpaid income taxes are forgiven. a. True b. False 11 ANSWER: False RATIONALE: The taxes and interest are not forgiven. Only the penalties are forgiven. 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 ANSWER: True RATIONALE: In view of tight state finances, decoupling from various Federal tax cuts has become quite common. 41. The principal objective of the FUTA tax is to provide some measure of retirement security. a. True b. False ANSWER: False RATIONALE: This is the objective of the FICA tax. 42. Currently, the tax base for the Social Security component of the FICA is not limited to a dollar amount. a. True b. False ANSWER: False RATIONALE: There is no dollar amount limitation on the Medicare component of FICA. 43. A parent employs his twin daughters, age 17, in his sole proprietorship. The daughters are not subject to FICA coverage. a. True 12 b. False ANSWER: True RATIONALE: An exemption exists for taxpayer’s children who are under age 18. 44. Unlike FICA, FUTA requires that employers comply with state as well as Federal rules. a. True b. False ANSWER: True RATIONALE: This is a major difference between FICA and FUTA. 45. A major advantage of a flat tax type of income tax is its simplicity. a. True b. False ANSWER: True 46. The value added tax (VAT) has not had wide acceptance in the international community. a. True b. False ANSWER: False RATIONALE: Its use in 100 countries seems to represent “wide acceptance.” 47. If 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 13 ANSWER: False RATIONALE: It indicates that the IRS is not always choosing the right returns to audit (i.e., those that contain errors). 48. The amount of a taxpayer’s itemized deductions will increase the chance of being audited by the IRS. a. True b. False ANSWER: True RATIONALE: If the taxpayer has itemized deductions that are unusually large, the chances of being selected for audit increase. 49. In an office audit, the audit by the IRS takes place at the office of the taxpayer. a. True b. False ANSWER: False RATIONALE: What is described is a field audit. An office audit takes place at the office of the IRS. 50. The IRS agent auditing the return will issue an RAR even if the taxpayer owes no additional taxes. a. True b. False ANSWER: True RATIONALE: An RAR can result in no change, a deficiency, or a refund. 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 14 b. False ANSWER: True 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 ANSWER: False RATIONALE: If begins on the due date of the return. 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 ANSWER: False RATIONALE: Unless fraud is involved, the statute of limitations in this case is six years. 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 ANSWER: True 55. If fraud is involved, there is no time limit on the assessment of a deficiency by the IRS. a. True b. False a. 15 True ANSWER: True 56. The IRS is required to redetermine the interest rate on underpayments and overpayments once a year. a. True b. False ANSWER: False RATIONALE: Interest rates are determined quarterly by the IRS. 57. A calendar year taxpayer files his 2013 Federal income tax return on March 5, 2014. The return reflects an overpayment of $6,000, and the taxpayer requests a refund of this amount. The refund is paid on May 16, 2014. The refund need not include interest. a. True b. False ANSWER: True RATIONALE: Because 45 days have not gone by since the due date of the return, interest need not be paid on the refund. 58. For individual taxpayers, the interest rate for income tax refunds (overpayments) is the same as that applicable to assessments (underpayments). a. True b. False ANSWER: True RATIONALE: There exists no difference in the applicable interest rates for individual taxpayers. 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 increased by the amount of the failure to pay penalty.